The Time-Varying Degree of Inflation Expectations Anchoring

Abstract

Well-anchored inflation expectations have become a key indicator for the credibility of a central bank's inflation target. Since the outbreak of the recent financial crisis, the existence and the degree of de-anchoring of U.S. inflation expectations have been under debate. This paper introduces an encompassing time-varying parameter model to analyze the changing degree of U.S. inflation expectations anchoring. We confirm that inflation expectations have been partially de-anchored during the financial crisis. Yet, our results suggest that inflation expectations have been successfully reanchored ever since.

The Time-Varying Degree of Inflation Expectation Anchoring in Bolivia

“…Thus, we have four models, the results of which appear in Table 3. The results show a greater degree of anchoring in the medium term than in the short term, in line with the results of Carrasco and Ferreiro (2013), Strohsal, Melnick and Nautz (2015) or IMF (2016). The coefficient of past inflation becomes smaller and not significant in the second, third, and fourth years.…”

“…Also, we use information from Focus Economics, which has data on inflation expectations up to five years ahead. Following the work of Łyziak and Paloviita (2016) and Strohsal, Melnick and Nautz (2015), we found that past inflation and short-term expectations do not have a significant impact. Meanwhile, the implicit target would be the main reference for the formulation of medium-term inflation expectations.…”

“…This means that the degree of anchoring can change over time, so using a model with constant parameters may not be the best option. In that sense, in the present document a time-varying parameter model is estimated, in line with other works such as Demertzis, Marcellino and Viegi (2012) and Strohsal, Melnick and Nautz (2015).…”

“…According to Strohsal, Melnick and Nautz (2015), the central bank's credibility can be gained, but it can also be lost. As a consequence, the degree of inflation expectations anchoring might not be constant over time.…”

“…If medium-term inflation expectations are well anchored, they should not respond to changes from short-term inflation expectations. In this case, following the work of Strohsal, Melnick and Nautz (2015), medium-term inflation expectations 29 ( , ) are a function of observed inflation ( −1 ), short-term expectations 30 ( , ) and the implicit inflation target ( * ):…”