Are US inflation expectations re-anchored?

Abstract

Anchored inflation expectations are of key importance for monetary policy. If long-term inflation expectations are well-anchored, they should be unaffected by short-term economic news. This letter introduces newsregressions with multiple endogenous breaks to investigate the de-and re-anchoring of US inflation expectations. We confirm earlier evidence on the de-anchoring of expectations driven by the outbreak of the crisis. Our results indicate that expectations have not been re-anchored ever since.

The Time-Varying Degree of Inflation Expectations Anchoring

“…For the U.S., more recent contributions focusing on the effect of macroeconomic news suggest a de-anchoring of expectations since the outbreak of the financial crisis, see Galati et al (2011) and Autrup and Grothe (2014). According to the results of multiple endogenous break tests provided by Nautz and Strohsal (2015), U.S. inflation expectations have not been re-anchored ever since.…”

Time-varying persistence of inflation: evidence from a wavelet-based approach

“…3 At the theoretical level, inflation persistence plays an important role, mainly because it associates with the theory of inflationary expectations and nominal anchors. New-Keynesian dynamic stochastic general equilibrium (DSGE) macroeconomic models that incorporate lags of inflation in the new Keynesian Phillips curve (NKPC) 4 identify inflationary expectations as the main determinant of inflation persistence, suggesting that inflation persistence may decline through enhanced anchoring of inflation expectations (Mishkin, 2007;Nautz and Strohsal, 2015).…”

The time-varying degree of inflation expectations anchoring

“…Using a time-varying parameter model and considering both sources of de-anchoring jointly, our findings may reconcile the mixed evidence regarding inflation expectations anchoring in the U.S. On the one hand, the brief but nevertheless significant period of de-anchored inflation expectations stirred by the outbreak of the financial crisis confirms recent evidence on de-anchoring provided by studies relying on regressions with constant parameters, cf. Nautz and Strohsal (2015). In contrast to constant parameter models with regime-shifts, the more flexible time-varying parameter approach is able to detect that monetary policy re-anchored inflation expectations rather quickly.…”

“…Second, constant parameter models with endogenous break point tests require a minimum number of observations in each regime. For example, Nautz and Strohsal (2015) have to assume a minimum regime length of 6 months. As a consequence, this model is not designed to reveal shorter de-anchoring periods.…”

“…Galati et al (2011) and Autrup and Grothe (2014). Nautz and Strohsal (2015) employ multiple endogenous break point tests to demonstrate that U.S. long-term inflation expectations respond to news and were, therefore, de-anchored by the crisis. Since there is no second break detected, they conclude that expectations have not been re-anchored ever since.…”