Expectations' Anchoring and Inflation Persistence

By Rudolfs Bems, Francesca Caselli, Francesco Grigoli, Bertrand Gruss, Weicheng Lian

December 11, 2018

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Rudolfs Bems, Francesca Caselli, Francesco Grigoli, Bertrand Gruss, and Weicheng Lian. Expectations' Anchoring and Inflation Persistence, (USA: International Monetary Fund, 2018) accessed November 23, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Understanding the sources of inflation persistence is crucial for monetary policy. This paper provides an empirical assessment of the influence of inflation expectations' anchoring on the persistence of inflation. We construct a novel index of inflation expectations' anchoring using survey-based inflation forecasts for 45 economies starting in 1989. We then study the response of consumer prices to terms-of-trade shocks for countries with flexible exchange rates. We find that these shocks have a significant and persistent effect on consumer price inflation when expectations are poorly anchored. By contrast, inflation reacts by less and returns quickly to its pre-shock level when expectations are strongly anchored.

Subject: Foreign exchange, Monetary policy, Prices

Keywords: Anchoring, Commodity prices, Commodity terms of trade index, Commodity terms-of-trade shock, Consumer price inflation, Consumer prices, Credibility, Exchange rate, Exchange rate arrangements, Inflation, Inflation dynamics, Inflation expectation, Inflation expectations, Inflation performance, Inflation persistence, Inflation surprise, Inflation targeting, Terms of trade, Terms-of-trade shock, WP

Publication Details

Pages:

31
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/280
Stock No:

WPIEA2018280
ISBN:

9781484388846
ISSN:

1018-5941

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