Monetary Policy Surprises and Inflation Expectation Dispersion

By Bertrand Gruss, Sandra V Lizarazo Ruiz, Francesco Grigoli

November 13, 2020

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Bertrand Gruss, Sandra V Lizarazo Ruiz, and Francesco Grigoli. Monetary Policy Surprises and Inflation Expectation Dispersion, (USA: International Monetary Fund, 2020) accessed November 21, 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

Anchoring of inflation expectations is of paramount importance for central banks’ ability to deliver stable inflation and minimize price dispersion. Relying on daily interest rates and inflation forecasts from major financial institutions in the United States, we calculate monetary policy surprises of individual analysts as the unexpected changes in the federal funds rate before the meetings of the Federal Reserve Board. We then assess the effect of monetary policy surprises on the dispersion of inflation expectations, a proxy for the extent of anchoring, which is based on the same analysts’ inflation projections submit-ted after the Fed meetings. With an identification strategy that hinges on a tight window around the Fed meetings, we find that monetary policy surprises lead to an increase in the dispersion of inflation expectations up to nine months after the policy meeting. We rationalize these results with a partial equilibrium model that features rational expectations and sticky information. When we allow the degree of information rigidity to depend on the realization of firm-specific shocks, the theoretical results are qualitatively consistent and quantitatively close to the empirical evidence.

Subject: Central bank policy rate, Economic forecasting, Financial institutions, Financial services, Futures, Inflation, Inflation targeting, Monetary policy, Prices

Keywords: Anchoring, Central bank policy rate, Disagreement, Dispersion, Expectation decrease, Expectation disagreement, Expectation dispersion, Futures, Global, In?ation expectations, Inflation, Inflation dispersion, Inflation expectation, Inflation expectation formation mechanism, Inflation expectations, Inflation release, Inflation targeting, Information rigidity, Monetary policy surprise, Price level, Standard deviation, Sticky information, Sticky information., WP

Publication Details

Pages:

38
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/252
Stock No:

WPIEA2020252
ISBN:

9781513559650
ISSN:

1018-5941

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