Expectations Of Future Inflation Research Articles

The effects of PPI and CPI in prediction of interest rate value

Interest, which is as old as the history of humanity, is at the center of life today in parallel with the developments in technology and communication. Predicting the future values of interest, which is very important in every field from state administration to individual investments and expenditures, is very important for individuals/companies/ states to continue their activities in a stable manner. In pioneering studies, it has been emphasized that the main components of interest are real interest and future inflation expectations. Over time, the effects of goods, money, and international markets on the formation of interest have been analyzed theoretically and empirically. The effects of Central Banks on monetary policies and their long-term reflections have been the aim of many studies in recent history. The fact that the expected inflation in interest studies does not reflect the truth for many times has prevented the right results from being found. For this reason, it is seen that the realized CPI is generally used in estimating the interest rate. In addition, when countries are examined, it is seen that there are significant differences between CPI and PPI. The aim of this study is to empirically investigate which of the CPI and PPI values realized in estimating the interest rate should be used and to what extent.

Has the Asymmetric Effect of Oil Price Change in Inflation Expectations Been Impacted by the COVID-19 Outbreak? A Comparison Between the United States and China

Economists and policymakers believe that households’ and firms’ expectations of future inflation are key determinants of actual inflation. This paper applies the ARDL model and nonlinear ARDL model to long-term inflation-targeting policy mechanisms in the United States and China to assess the impact of oil price dynamics and asymmetries on inflation expectations, as well as the difference of this impact before and after the COVID-19 pandemic. In order to show the significant role of the COVID-19 outbreak, this paper includes the data from 2010 to 2021 and takes the pandemic period as a structural break. Taking oil price changes as a variable of interest, and introducing some other significant variables, we find that during the pandemic, the positive impact of oil price shock on U.S. inflation expectations has enhanced, whereas the positive impact on Chinese inflation expectations has weakened. There is also sufficient evidence of the existence of the asymmetric effects of oil price changes on inflation expectations in both countries, but the positive oil price change in the United States has always played a larger role than the negative oil price shock. In China, the impact of positive oil price shock was greater than that of negative oil prices before the epidemic and the effect of negative oil price shocks has increased significantly in the COVID-19 regime.

The Change in Inflation Expectation During and Post the Pandemic in European Region

What people anticipate inflation to be in the future is known as inflation expectations. These future inflation expectations are significant because they have an impact on people's actions now, which in turn has an impact on inflation in the future. It is crucial to get the inflation expectation as close to the central bank's target as possible because doing so makes it easier for the bank to achieve its goal of inflation. This study tries to explore the inflation expectations in the European region and how they change during the pandemic and post-pandemic periods. The paper also offers a future prediction regarding the inflation expectation. In order to forecast the level of expected future inflation, the study conducts a comparative analysis including the GDP, unemployment rate, and consumer price index. In the end, it was discovered that future inflation expectations are typically less firmly anchored and higher than the central bank's target. The study's conclusion also suggests a possible way to make the expectation more certain.

Why do we think that inflation expectations matter for inflation? (And should we?)

Economists and economic policymakers believe that households’ and firms’ expectations of future inflation are a key determinant of actual inflation. A review of the relevant theoretical and empirical literature suggests that this belief rests on extremely shaky foundations, and a case is made that adhering to it uncritically could easily lead to serious policy errors.

Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?)

Economists and economic policymakers believe that households' and firms' expectations of future inflation are a key determinant of actual inflation. A review of the relevant theoretical and empirical literature suggests that this belief rests on extremely shaky foundations, and a case is made that adhering to it uncritically could easily lead to serious policy errors.

Gender roles produce divergent economic expectations

Expectations about economic variables vary systematically across genders. In the domain of inflation, women have persistently higher expectations than men. We argue that traditional gender roles are a significant factor in generating this gender expectations gap as they expose women and men to different economic signals in their daily lives. Using unique data on the participation of men and women in household grocery chores, their resulting exposure to price signals, and their inflation expectations, we document a tight link between the gender expectations gap and the distribution of grocery shopping duties. Because grocery prices are highly volatile, and consumers focus disproportionally on positive price changes, frequent exposure to grocery prices increases perceptions of current inflation and expectations of future inflation. The gender expectations gap is largest in households whose female heads are solely responsible for grocery shopping, whereas no gap arises in households that split grocery chores equally between men and women. Our results indicate that gender differences in inflation expectations arise due to social conditioning rather than through differences in innate abilities, skills, or preferences.

People’s Perceptions of Inflation (A Survey Data Analysis)

In this paper, we have presented our results from an online survey on people's perceptions of increase in price level, conducted by the authors. Based on the results, we have drawn conclusions and constructed some hypotheses which need further research to get a solid foundation. The survey has tried to explore three aspects of the associated perceptions: whether the respondents are aware of the increase in daily commodity prices or not, the reasons behind the increase in price level and the state of price level that is appropriate for the economy of Bangladesh.People’s expectations of inflation shape the future inflation of an economy. Similarly, people's take on inflation can help them build their expectations of future inflation. Therefore, studying the perspectives is important to get a more clarified picture of the future inflation. It can also help while formulating policies to control the price level or other associated macroeconomic variables. Additionally, the inspection can be a great assist to illustrate the behavioral glitch of the respondents in terms of the relation to the macroeconomic picture.We have tried to show the responses on the questions in terms of the age groups and groups consisting of respondents who have or do not have prior formal knowledge of Economics. An interesting behavior noticed in the case of the people with economics background is that their behavior is inconsistent with the modern economics theory.Age groups are divided into four categories. The research data shows that the majority of the respondents support the idea that bad governance has given them a reason to expect inflation. The least supported reason is the effect of monetary policy. People do not tend to think that much about the impacts of monetary policy. COVID-19 pandemic leads a moderate number of respondents to formulate their perceptions on inflation. A highly negligible portion of respondents has said that they were not aware of the recent increase in the price level of daily commodities. A few hypotheses have also been developed from the analysis, which are mentioned in the discussion section. Further investigation is necessary to establish a statement in these cases.An interesting fact derived from this survey is that an important portion of people thinks that an increase in the price level to a limited extent is good for the economy of Bangladesh. Except for age group 3 (31-40), majority of all the groups support this idea. However, this inconsistent behavior among the age group 3 can be neglected since the more responses are necessary to establish this inconsistency as a significant issue. The second most supported appropriate inflationary state for the respondents is the decrease in price level.The responses were collected through Google Form. The data analysis and cleaning were performed using spreadsheet software.

Inflation targeting & implications of oil shocks for inflation expectations in oil-importing and exporting economies: Evidence from three Nordic Kingdoms

In the context of the debate on inflation targeting, this paper analyses the impact of the oil shocks on inflation expectations in three Nordic Kingdoms. A NARDL framework is applied to data from Jan 1994 to June 2018 on the Kingdoms of Norway, Sweden and Denmark. Our key findings suggest that there are considerable nonlinearities and asymmetries in the relationship between inflation expectations, oil shocks and economic determinants of inflation expectations. The expectations formulated in the past have a very significant negative impact on future inflation expectations (adaptive expectations) and there is heterogeneity in the adaptiveness pace. A country's net oil trade position seems to reflect on the impact of oil price shocks on the inflation expectations and there is asymmetry and downwards inflation expectations rigidity. There is strong evidence of exchange rate pass-through to inflation expectations. Prevailing regimes of price stability can support to anchor future inflation expectations. Reduction in fiscal deficit and increases in money supply has a positive impact while unemployment has a negative impact on inflation expectations. The cumulative multiplier analysis showed that the impact of oil shock was symmetric in Sweden and Denmark but asymmetric in Norway which is a large net oil exporter. Besides the adoption of explicit inflation targeting regime by Sweden and Norway, the inflation expectations in the underlying economies are prone to the oil price shocks and macroeconomic determinants. These shocks pose a whole set of challenges to monetary authorities in these economies and the findings in the subject treatise provide some guidance on how each shock may transmit.

Comment

Comment

Core and ‘Crust’: Consumer Prices and the Term Structure of Interest Rates

Abstract We propose a no-arbitrage model of the nominal and real term structures that accommodates the different persistence and volatility of distinct inflation components. Core, food, and energy inflation combine into a single total inflation measure that ties nominal and real risk-free bond prices together. The model successfully extracts market participants’ expectations of future inflation from nominal yields and inflation data. Estimation uncovers a factor structure common to core inflation and interest rates and downplays the pass-through effect of short-lived food and energy shocks on inflation and interest rates. Model forecasts systematically outperform survey forecasts and other benchmarks. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

The meta-Phillips Curve: Modelling U.S. inflation in the presence of regime change

A novel approach to modelling inflation dynamics is presented based on a set of Hybrid New-Keynesian Phillips Curves, distinguished by the regime duration, and combined into a meta-Phillips Curve using model averaging techniques. The analysis of US data over 1950q1−2016q1 shows that, while the importance of expectations of future inflation varies through time depending on the monetary policy regime and economic environment, future expectations make a more substantial contribution to current inflation than past inflation.

The Effects of Oil Supply and Demand Shocks on U.S. Consumer Sentiment

AbstractThis paper investigates how the University of Michigan's Index of Consumer Sentiment responds to oil price shocks. While oil supply shocks play only a limited role, the effect of aggregate demand shocks is positive for the first few months and negative thereafter. A typical other oil demand shock has a significant negative impact for up to 2 years. By studying the responses of individual survey questions, we find that expectations of future inflation and a change in real household income as well as perceived vehicle and house buying conditions are the main transmission channels of oil supply and demand shocks.

A model of fiscal dominance under the “Reinhart Conjecture”

This paper proposes some simple models where the central bank trades off between stabilizing the business cycle and targeting inflation to a level that stabilizes the public debt ratio. We show that in a closed economy fiscal dominance does not necessarily imply hyperinflation. Moreover, in an open economy it is successful in lowering debt ratios when output is reactive enough to unconventional monetary policy and when the expectations of future inflation are well anchored to the debt-stabilization inflation target. We show that the dynamics of both inflation and public debt ratio are described by first-difference equations with time varying coefficients. We provide some conditions for the asymptotic solutions of the long-run steady states. In particular, we define two regimes of respectively strong and weak fiscal dominance, depending upon whether or not the central bank's action ensures both the sustainability and the speed of convergence of debt to its long-term level.

Learning, robust monetary policy and the merit of precaution

Abstract We study in a New Keynesian framework the consequences of adaptive learning for the design of robust monetary policy. Compared to rational expectations, the fact that private sector follows adaptive learning gives the central bank an additional intertemporal trade-off between optimal behavior in the present and in later periods thanks to its ability to manipulate future inflation expectations. We show that adaptive learning imposes a more restrictive constraint on monetary policy robustness to ensure the dynamic stability of the equilibrium than under rational expectations but strengthens the argument in favor of a more aggressive monetary policy when the central bank fears for model misspecifications.

The term structure of liquidity premia and the macroeconomy in Canada: A dynamic latent-factor approach

This study derives the term structure of liquidity premia using the stationary vector-stochastic process for the expectation hypothesis of Campbell and Shiller (1987, 1991). The bivariate VAR model identifies liquidity premia for 12 bond yields that are mean-stationary. A state-space representation for a dynamic factor model captures three well-known latent factors for the term premium curve – level, slope, and curvature. The latent factors are able to aggregate the information from the 12 term premia to accurately identify a term premium curve that increases in maturity on average to 117 basis points. The dynamic factor estimations with macroeconomic variables capture important links from the macroeconomy to the term premium factors that indicate the term premium curve responds to higher inflation and interest rates and to higher expectations of future inflation due to excess demand. Regime-switching estimations for the variances of the latent factors stochastically divide the sample period into high- and low-variance regimes. The dynamic factor models for the two regimes indicate that the term premium curve has steepened by almost 50 basis points in the current low-variance regime relative to that in the previous high-variance regime.

Optimal Monetary Policy with Heterogeneous Agents

Incomplete markets models with heterogeneous agents are increasingly used for policy analysis. We propose a novel methodology for solving fully dynamic optimal policy problems in models of this kind, both under discretion and commitment. We illustrate our methodology by studying optimal monetary policy in an incomplete-markets model with non-contingent nominal assets and costly inflation. Under discretion, an inflationary bias arises from the central bank’s attempt to redistribute wealth towards debtor households, which have a higher marginal utility of net wealth. Under commitment, this inflationary force is countered over time by the incentive to prevent expectations of future inflation from being priced into new bond issuances; under certain conditions, long run inflation is zero as both effects cancel out asymptotically. For a plausible calibration, we find that the optimal commitment features first-order initial inflation followed by a gradual decline towards its (near zero) long-run value. Welfare losses from discretionary policy are first-order in magnitude, affecting both debtors and creditors.

Editors’ Introduction

Editors’ Introduction

Expectations of inflation: The biasing effect of thoughts about specific prices

National surveys follow consumers’ expectations of future inflation, because these may directly affect the economic choices they make, indirectly affect macro-economic outcomes, and are considered in monetary policy. Yet, relatively little is known about how individuals form the inflation expectations they report on consumer surveys. Medians of reported inflation expectations tend to track official estimates of realized inflation, but show large heterogeneity between respondents, due to some expecting seemingly extreme inflation. We present two studies to examine whether individuals who consider specific price changes when forming their inflation expectations report more extreme and disagreeing inflation expectations due to focusing on specific extreme price changes. In Study 1, participants who were instructed to recall any price changes or to recall the largest price changes both thought of items for which price changes were perceived to have been extreme. Moreover, they reported more extreme year-ahead inflation expectations and showed more disagreement than did a third group that had been asked to recall the average change in price changes. Study 2 asked participants to report their year-ahead expectations of inflation, without first prompting them to recall specific price changes. Half of participants nevertheless thought of specific prices when generating their inflation expectations. Those who thought of specific prices reported more extreme and more disagreeing inflation expectations, because they were biased towards various items associated with more extreme perceived price changes. Our findings provide new insights into expectation formation processes and have implications for the design of survey-based measures of inflation.

Expectations of Inflation: The Biasing Effect of Thoughts about Specific Prices

National surveys follow consumers’ expectations of future inflation, because they may directly affect the economic choices they make, indirectly affect macroeconomic outcomes, and be considered in monetary policy. Yet relatively little is known about how individuals form the inflation expectations they report on consumer surveys. Medians of reported inflation expectations tend to track official estimates of realized inflation, but show large disagreement between respondents, due to some expecting seemingly extreme inflation. We present two studies to examine whether individuals who consider specific price changes when forming their inflation expectations report more extreme and disagreeing inflation expectations due to focusing on specific extreme price changes. In Study 1, participants who were instructed to recall any price changes or to recall the largest price changes both thought of various items for which price changes were perceived to have been extreme. Moreover, they reported more extreme year-ahead inflation expectations and showed more disagreement than did a third group that had been asked to recall the average change in price changes. Study 2 asked participants to report their year-ahead inflation expectations, without first prompting them to recall specific price changes. Half of participants nevertheless thought of specific prices when generating their inflation expectations. Those who thought of specific prices reported more extreme and more disagreeing inflation expectations, because they were biased toward various items associated with more extreme perceived price changes. Our findings provide new insights into expectation formation processes and have implications for the design of survey-based measures of inflation.

INFLATION DYNAMICS AND SUBJECTIVE EXPECTATIONS IN THE UNITED STATES

I. INTRODUCTION This paper analyzes the ability of sticky-price models to explain the dynamics of U.S. inflation when using survey data as proxies for inflation expectations. Testing sticky-price models with survey expectations is attractive since, to the extent that survey data correctly capture agents' expectations, they allow to disregard issues related to the specification of agents' expectations functions. One neither has to impose untested orthogonality restrictions, as required when estimating under the assumption of rational expectations, nor has to make restrictive assumptions about the precise form of nonrationality present in agents' forecast functions. This allows to focus on the question whether the economic models under consideration are correctly specified. Previous tests of sticky-price models, performed under the assumption that agents hold rational expectations, have generated mixed results. Prominently, Fuhrer and Moore (1995) have reported that sticky-price models do not generate sufficient stickiness for inflation when the output gap is used as a measure of real marginal costs. Recent evidence, however, has shown that the empirical performance depends crucially on how one measures real marginal costs, the main determinant of inflation according to sticky-price models. For instance, Gall and Gertler (1999) and Sbordone (2002) show that sticky-price models perform well once marginal costs are approximated by average unit labor costs. (1) It makes an important difference whether sticky-price models successfully explain inflation dynamics as a function of output behavior or they relate inflation dynamics to the behavior of unit labor costs. Given that the ultimate objective is a model explaining the joint behavior of output and inflation, the latter case would require an additional empirically plausible theory linking the dynamics of unit labor costs to the behavior of output. This paper studies whether the currently popular New Keynesian Phillips Curve (NKPC), which can be derived from Calvo (1983) style sticky-price models, is able to explain a relationship between inflation on the one hand and output or unit labor costs on the other hand. Thus, we let the data speak whether a theory linking output to costs is warranted, once expectations are approximated by data reported in the Survey of Professional Forecasters. Our main finding is that the NKPC performs equally well with both measures of marginal costs, output and unit labor costs. Whatever measure is used, the estimate of the quarterly discount factor is close to one and the point estimate of the degree of price stickiness implies that firms reset their prices roughly every five quarters on average. These results suggest that potential nonrationalities in expectations, as they show up in surveys, have biased previous estimates using output as a measure for marginal costs. Quite surprisingly, the same nonrationalities do not seem to play a role when using unit labor costs. Here our estimates confirm the results obtained by Gall and Gertler (1999) and Sbordone (2002), who assumed rational expectations. We show that the reason for this finding is that approximating the agents' information set using the unit labor cost variable rests on more solid grounds than approximating it using the output variable. In particular, the survey data suggest that the hypothesis of rational expectations implies a too high correlation between lagged output and future inflation expectations. We show that this causes the coefficient estimate for output to become negative, contrary to what is implied by theory. These results suggest that once one takes account of potentially nonrational expectations via survey expectations, sticky-price models are able to establish a close link between output dynamics and the behavior of inflation. To assess the robustness of this finding, we include into the price equation lags of various variables and test for their significance. …