2018
DOI: 10.18651/rwp2018-01 View full text |Buy / Rent full text
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Abstract: High-frequency empirical evidence suggests that inflation expectations in the United States became better anchored after the Federal Reserve began communicating a numerical inflation target. Using an event-study approach, we find that forward measures of inflation compensation became unresponsive to news about current inflation after the adoption of an explicit inflation target. In contrast, we find that forward measures of nominal compensation in Japan continue to drift with news about current inflation, even… Show more

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“…Our finding about the timing of the shift in the predictability metric after the adoption of a formal inflation target is consistent with Bundick and Smith (2018), who find that the sensitivity of long-horizon-forward breakeven inflation to surprise news in realized inflation declined after the adoption of a formal inflation target. In both cases, forecastable variations in the long-run inflation expectations declined.…”
Section: ′ ′supporting
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“…Our finding about the timing of the shift in the predictability metric after the adoption of a formal inflation target is consistent with Bundick and Smith (2018), who find that the sensitivity of long-horizon-forward breakeven inflation to surprise news in realized inflation declined after the adoption of a formal inflation target. In both cases, forecastable variations in the long-run inflation expectations declined.…”
Section: ′ ′supporting
“…This definition is called into question by other works. For instance, Bundick and Smith (2018) show that the structure of inflation expectations in the US has changed since the announcement of an inflation target in January 2012. In Japan, the announcement of a quantified target of inflation (2%) was one of the goals of the Abenomics in 2013.…”
Section: Data and Descriptive Statisticsmentioning
“…Improvements in anchoring subsequent to a target announcement are documented in Gürkaynak et al (2007). This phenomenon is also reported-particularly in the case of the United States-in Bundick and Smith (2018), who find that market-based measures of inflation compensation indicate that inflation expectations became better anchored after the Federal Open Market Committee (FOMC) adopted a 2% inflation target. Interestingly, the authors note that inflation expectations have remained well anchored despite a series of lowerthan-expected inflation reports in 2017.…”
Section: Anchoring Of the Inflation Expectationsmentioning