The people versus the markets: a parsimonious model of inflation expectations

Reis, Ricardo ORCID: 0000-0003-4844-9483 (2021) The people versus the markets: a parsimonious model of inflation expectations. CEPR Press Discussion Paper (15624). Centre for Economic Policy Research (Great Britain), London, UK.

Full text not available from this repository.

Abstract

Expected long-run inflation is sometimes inferred using market prices, other times using surveys. The discrepancy between the two measures has large business-cycle fluctuations, is systematically correlated with monetary policies, and is mostly driven by disagreement, both between households and traders, and between different traders. A parsimonious model that captures both the dispersed expectations in surveys, and the trading of inflation risk in financial markets, can fit the data, and it provides estimates of the underlying expected inflation anchor. Applied to US data, the estimates suggest that inflation became gradually, but steadily, unanchored from 2014 onwards. The model detects this from the fall in cross-person expectations skewness, first across traders, then across people. In general equilibrium, when inflation and the discrepancy are jointly determined, monetary policy faces a trade-off in how strongly to respond to the discrepancy.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://cepr.org/publications/discussion-papers
Additional Information:	© 2021 The Author
Divisions:	Economics
Subjects:	H Social Sciences > HB Economic Theory
JEL classification:	E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy (Targets, Instruments, and Effects) D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations; Speculations
Date Deposited:	10 Feb 2023 10:45
Last Modified:	11 Dec 2024 19:44
URI:	http://eprints.lse.ac.uk/id/eprint/118142

Actions (login required)

View Item