Working Paper Revision

Maintaining the Anchor: An Evaluation of Inflation Targeting in the Face of COVID-19

Abstract: This paper provides evidence that inflation targeting delivered anchored inflation expectations during the post-2020 inflation surge. Using a macroeconomic model, we illustrate how long-term nominal interest rates respond to an unexpected burst of inflation under both anchored and unanchored inflation expectations. We then evaluate these predictions using high-frequency financial market data from nine advanced economies and illustrate three main findings. First, inflation expectations embedded in asset prices were just as well, or in some countries better anchored, after the pandemic. Second, this favorable outcome was broadly accompanied by perceptions of an aggressive monetary policy response to above-target inflation. And, third, the stability of longer-term inflation expectations greatly improved labor market outcomes during disinflation, contributing to much smaller sacrifice ratios relative to the 1970’s and 80’s.

JEL Classification: E32; E52;

https://doi.org/10.18651/RWP2024-15

Bibliographic Information

Provider: Federal Reserve Bank of Kansas City

Part of Series: Research Working Paper

Publication Date: 2026-06-04

Number: RWP 24-15

Related Works

• Working Paper Revision (2026-06-04) : You are here.
• Working Paper Original (2024-12-20) : Maintaining the Anchor: An Evaluation of Inflation Targeting in the Face of COVID-19