Inflation Expectations Research Articles

(Mis)Alignment between observed and expected monetary policy: The case of Brazil

The economic agents’ perception of the monetary policy might not coincide with the central bank conduct. We investigate this issue by using both actual and expected data identified by professional forecasters for Brazil, an emerging economy that has long adopted the inflation-targeting regime. We estimate observed, expected, and forward-looking interest rate rules, apply Full-Information Rational Expectations (FIRE) tests, assess restrictions implied by models of information rigidity, and perform several robustness checks. The estimated policy rules respond to inflation deviations and output gap according to theoretical grounds. Professional forecasters, however, do not believe in aggressiveness to fight inflation in longer forecasting horizons, while FIRE tests unveil information rigidity in the short run. There is a misalignment between the Central Bank practice and the private agents’ perception of the monetary policy in the long but not in the short run, suggesting unanchored long-term inflation expectations.

Understanding Global Commodity Price Shocks on Exchange Rates and Inflation in Emerging Economies: ARDL Perspective

Aims: To analyze the changing relationship between commodity prices (cocoa, diesel, gold, oil, petrol) and macroeconomic factors (exchange rate and inflation) in Ghana and differentiate between long-term and short-term effects.
 Study Design: Quantitative Design with Time series analysis using the Autoregressive Distributed Lag (ARDL) technique.
 Methodology: The study utilized cointegration and Error Correction Model in econometric estimation. Time series data for commodity prices and macroeconomic factors were collected for the period 2003M01 to 2023M10. The ARDL technique was applied to differentiate between long-term and short-term effects of inflation and exchange rates.
 Results: The short-run and long-run results indicate a positive relationship between commodity prices and inflation and exchange rates. A 1% increase in diesel prices is associated with a 0.23% appreciation in Ghana's currency in the short run (p=0.019) and a 1.76% rise in inflation in the long run (p=0.012). Past inflation has a dominant influence on current inflation, with a 1 percentage point increase in the previous year's inflation leading to a 0.45 percentage point increase in the current inflation rate.
 Conclusion: Policymakers should prioritize stabilizing diesel prices, invest in storage facilities, promote alternative energy sources, strengthen domestic production and distribution of essential commodities, and adopt targeted monetary and fiscal policies to anchor inflationary expectations and address inflation inertia in Ghana.

Assessing the predictability of the Bank of Russia decisions on the key rate and informational advantage in its forecasting

The communication policy of central banks plays a significant role in setting the expectations of economic agents. If key rate decisions are inconsistent with market expectations, managing expectations and anchoring inflation expectations may be difficult. We assess the predictability of the Bank of Russia’s key rate decisions over the 2021—2023 period in two ways: using media surveys of analysts and shifts in the Russian government bond index and the daily volatility of its yield. The results show a significant impact of unexpected key rate decisions on Russian government bond prices and daily volatility. Then, using statistical metrics computed from macroeconomic survey data and another linear and piecewise linear model, we find the informational advantage of the Bank of Russia in predicting the key rate. The decisions unexpected for the market are explained by the information advantage of the Bank of Russia, as well as the realization of geopolitical and inflation risks in the period under study. Thus, we conclude that there is a need to improve the quality of communication regarding future decisions. As the communication policy develops, the predictability of the Bank of Russia’s decisions on the key rate will increase. In turn, economic agents and market participants will adapt to the expected decisions in advance, which will accelerate the achievement of the inflation target and the adjustment of inflation expectations.

Inflation Expectations, Liquidity Premia and Global Spillovers in Japanese Bond Markets

We provide market-based estimates of Japanese inflation expectations using an arbitrage-free dynamic term structure model of nominal and real yields that accounts for liquidity premia and the deflation protection afforded by Japanese inflation-indexed bonds, known as JGBi’s. We find that JGBi liquidity premia exhibit significant variation, and even switch sign. Properly accounting for them significantly lowers the estimated value of the indexed bonds’ deflation protection and affects inflation risk premium estimates. After liquidity adjustment, long-term Japanese inflation expectations have remained relatively stable at levels modestly exceeding one percent during the pandemic period. We then utilize our estimated liquidity measure to confirm the existence of statistically significant and economically meaningful spillovers to the JGBi market from global bond market illiquidity, as proxied by periods of low U.S. Treasury market depth.

The impact of markups and wages on changes in the level of inflation in Poland

This paper analysis of the impact of markups and wages of enterprises on changes in the level of inflation in Poland in the years 2007-2022. the impact of markups and wages on changes in CPI were assessed using the VECM model, the impulse responses, and the variance decomposition. The results indicate that industrial sector, including the mining and quarrying section, showed the highest dynamics of changes in markups and wages. In the years 2005–2022, the impact of markups on changes in CPI was stronger, although it was losing importance, with a weaker but growing impact of wages. Forecasts of the degree of clarification of the CPI in Poland indicate a greater importance of markups, with the impact of wages weaker by half, but growing over time. The paper extends the state of theoretical and empirical studies on the determinants of the CPI and the inflation expectations. It also considers the context of persistent exogenous and endogenous shocks from the COVID-19 pandemic and the war in Ukraine, and changes in demand and supply impulses. The results of this study may be valuable as a contribution to the literature on inflation and its forecasts, and for monetary policy makers.

The role of foreign reserves in inflation dynamics

Purpose – Central banks’ foreign reserve stocks in emerging markets have increased substantially in recent decades. Foreign reserves accumulation has been widely believed as a shock absorber to prevent financial crises. Meanwhile, accelerating foreign reserves might be contradictory to the monetary policy objectives. This research aims to investigate the impact of foreign reserves on the inflation dynamics.Method – We apply the inflation-expectation augmented Phillips curve on the monthly data over the period of 2005(7) to 2020(12) in the case of Indonesia. Findings – We show that stockpiling foreign exchange reserves indeed has an inflationary pressure impact. The central bank's intervention in the foreign exchange market is more significant in selling rather than purchasing foreign exchange. However, the non-monetary factors also play an important role in determining inflation. Implications – Considering channels through which foreign reserves might affect inflation, our findings suggest the monetary authority should be concerned with inflationary expectations in the short term as one of the major policy-driven goals to maintain price stability in the long run.Originality – This paper contributes to the literature on monetary policy in developing countries. Unlike other empirical studies, this research employs the inflation-expectation augmented Phillips curve and accommodates the issue of asymmetric effects of the change in foreign reserves.

Tales of Turbulence: BERT-based Multimodal Analysis of FED Communication Dynamics Amidst COVID-19 Through FOMC Minutes

AbstractThis study analyzes Federal Open Market Committee (FOMC) minutes using state-of-the-art Natural Language Processing techniques. We sought to investigate the effect of the global COVID-19 crisis on the FOMC minutes’ pattern and the strength of the Federal Reserve to influence inflation expectations through its primary press releases. To this end, we first quantified minutes leveraging domain-specific pre-trained Bidirectional Encoder Representations from Transformers models (FinBERTs). Then, we applied dynamic time warping to measure temporal sequence proximity over time. In addition, we built multivariable autoregressive integrated moving average models to verify our findings by injecting exogenous variables as indicator functions into the time series. The results suggest that the Federal Reserve has abstained from adjusting its tone and the forward-lookingness settings of its statements for the global pandemic. Therefore, the longstanding association of the FED's tone and forward-lookingness with consumers’ inflation expectations index has weakened during the global health crisis.

ДЕТЕРМІНАНТИ ПОВЕДІНКИ ПОКУПЦІВ НА СПОЖИВЧОМУ РИНКУ УКРАЇНИ В УМОВАХ ВОЄННОГО СТАНУ

The purpose of the study is to identify typical determinants of consumer behavior under martial law. The article attempts to analyze consumer behavior and its impact on the consumer market of Ukraine. The key factors determining consumer behavior in the consumer market of Ukraine under conditions of military operations have been identified. The dynamics of indices of consumer sentiment in Ukraine were analyzed, in particular: indices of inflation expectations, consumer sentiment, current situation, economic expectations, expectations regarding the dynamics of unemployment, and their interrelationships were also analyzed. The trends revealed by the change in the consumer behavior of the population of Ukraine under the conditions of martial law are substantiated. Recommendations for business and government on effective management of the consumer market and ensuring economic stability in conditions of military conflict have been developed.

Abrupt monetary policy change and unanchoring of inflation expectations

Inflation expectations can quickly become unanchored if the central bank undermines its commitment to the inflation target. This paper exploits an abrupt change in monetary policy by the Brazilian Central Bank in 2011 and microdata from a daily survey of professional forecasters to establish support for this claim. Reanchoring came only years later, after a regime shift that included a change of government. A simple model with a well-defined concept of (un)anchored inflation expectations provides a coherent explanation and structural interpretation of our empirical findings.

Inflation—Who Cares? Monetary Policy in Times of Low Attention

AbstractI propose an approach to quantify attention to inflation and show that attention declined after the Great Inflation period. This decline in attention has important implications for monetary policy as it renders managing inflation expectations more difficult and can lead to inflation‐attention traps: prolonged periods of a binding lower bound and low inflation due to slowly adjusting inflation expectations. As attention declines, the optimal policy response is to increase the inflation target. The lower bound fundamentally changes the normative implications of declining attention: lower attention raises welfare absent the lower‐bound constraint, whereas it decreases welfare when accounting for the lower bound.

Managing inflation expectations and the efficiency of monetary policy responses to energy crises

While ascertaining low and stable inflation expectations is a significant challenge across developed and emerging economies, energy shocks are central to this endeavor. Therefore, this study's prime objective is to investigate the role of energy shocks, monetary policy, and fiscal policy in managing inflation expectations in the context of the Federal Reserve's inflation targeting regime, adopted in 2012. We analyze monthly data on the United States from 1994 to 2022. Using the linear Autoregressive Distributed Lag (ARDL) and the Quantile ARDL (QARDL) estimators, we analyze and compare three different samples: full period, pre-inflation targeting regime (1994 to 2012), and post-inflation targeting regime (2012 to 2022). The conclusions suggest that inflation, energy shocks, and money supply have significant implications for inflation expectations in most quantiles during pre- and post-inflation targeting regimes. Policy implications for research and practice are also discussed.

Trust in the central bank, financial literacy, and personal beliefs

This paper examines trust in the central bank across ten Central, Eastern and Southeastern European countries, using survey data collected from 61,398 individuals. Our results show that financially literate individuals are more likely to trust central banks. The association is stronger in countries with inflation targeting and flexible exchange rates regimes. Distrust in the central bank is associated with higher inflation expectations, savings in foreign currency or a preference for cash. Even when the sample is restricted to individuals with high inflation expectations, financial literacy remains associated with greater trust in the central bank. We find that trust in the central bank correlates negatively with financial inclusion but positively with wealth. Financially literate citizens express less trust in the government, which highlights that trust in the central bank is not entirely indicative of trust in the government. However, individuals who think that prices will rise and the local currency will depreciate distrust both the central bank and the government.

Correction: A systematic literature review of the implications of media on inflation expectations

Correction: A systematic literature review of the implications of media on inflation expectations

Heterogeneous responsiveness of consumers’ medium-term inflation expectations

Using a large euro area survey, we study the responsiveness of consumers’ medium-term inflation expectations to changes in actual inflation and short-term inflation expectations. We find that high trust in the central bank and high financial literacy lower this responsiveness.

The inflation expectations of U.S. firms: Evidence from a new survey

Introducing a new survey of U.S. firms’ inflation expectations, we document key stylized facts involving what U.S. firms know and expect about inflation and monetary policy. The resulting time series of firms’ inflation expectations displays unique dynamics, distinct from those of households and professional forecasters. By any typical definition of “anchored” expectations, the inflation expectations of U.S. managers in a low-inflation environment appear far from anchored, much like those of households. And like households, U.S. managers are largely uninformed about recent aggregate inflation dynamics or monetary policy. These results complement existing evidence on firms’ inflation expectations from other countries and confirm that inattention to inflation and monetary policy is pervasive among U.S. firms as well.

On the resilience of cryptocurrencies: A quantile-frequency analysis of bitcoin and ethereum reactions in times of inflation and financial instability

This study examines the resilience of Bitcoin and Ethereum to inflation and financial instability amidst major economic and political disruptions, including the U.S.-China trade war, the COVID-19 pandemic, the Ukrainian conflict, the collapse of Silicon Valley Bank, and the ensuing energy crisis. We employ wavelet coherence analysis and the quantile coherence method to unravel the complex relationship between these cryptocurrency prices, the 5-year breakeven inflation rate, and the U.S. Financial Stress Index (FSI), utilizing daily data from April 16, 2018, to April 14, 2023. Our results reveal that during turbulent times, investors adjust their Bitcoin holdings in response to inflation expectations, driving up Bitcoin prices in both the short and long term. However, Bitcoin’s effectiveness as an inflation hedge diminishes in bearish market conditions, and it proves unreliable as a hedge against financial instability. The relationship between Ethereum and inflation expectations is found to be more context-dependent. Also, while Ethereum’s vulnerability to financial instability is less persistent in the long run, it increases in bearish markets.

Mutual fund flows and government bond returns

We investigate daily flows to Israeli government bonds mutual funds, which are held primarily by retail investors. We divide the bonds into six categories: nominal/CPI-linked - short-term, intermediate-term, and long-term maturity. We find that unexpected daily net flows are contemporaneously correlated with price changes in all categories, with correlations ranging from 0.094 to 0.221 depending on the bond category. These price changes are significant, and they subsequently reverse fully or mostly within 10 trading days. The price reversal indicates that the initial price changes are due to “price pressure.” We find that these price distortions affect break-even inflation—a measure of inflation expectations. Our findings indicate that even government bonds are affected by retail price pressure.

Can Fiscal Consolidation Announcements Help Anchor Inflation Expectations?

Can Fiscal Consolidation Announcements Help Anchor Inflation Expectations?

Information Content of Inflation Expectations: A Copula-Based Model

Abstract This paper introduces a holistic framework that integrates copula modeling and information-theoretic measures to examine the information content of inflation expectations. Copulas are used to capture the dynamic dependence between inflation and expectations, accounting for extreme events and tail dependence. Information-theoretic measures are employed to quantify the information that expectations provide about inflation. Theoretical results establish a link between copula entropy and mutual information, propose a lower bound for copula entropy, and provide a practical tool for central banks to anchor expectations to achieve inflation targets. Empirical findings reveal higher uncertainty in the tails of the joint distribution and underscore the meaningful information carried by expected inflation for forecasting inflation, particularly with shorter-term expectations.

The Deflationary Bias of the ZLB and the FED's Strategic Response

AbstractThe paper shows, in a simple analytical framework, the existence of a deflationary bias in an economy with a low natural rate of interest, a zero lower bound (ZLB) constraint on nominal interest rates and a discretionary Central Bank (CB) with an inflation mandate. The presence of the ZLB prevents the CB from offsetting negative shocks to inflation whereas it can offset positive shocks. This asymmetry pushes average inflation below the target which in turn drags down inflation expectations and reinforces the likelihood of hitting the ZLB. We show that this deflationary bias is particularly relevant for a CB with a symmetric dual mandate (i.e., minimizing deviations from inflation and employment), especially when facing demand shocks. But a strict inflation targeter cannot escape the suboptimal deflationary equilibrium either. The deflationary bias can be mitigated by targeting “shortfalls” instead of “deviations” from maximum employment and/or using flexible average inflation targeting. However, changing monetary policy strategy risks inflation expectations becoming entrenched above the target if the natural interest rate increases.