Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of Kansas City
Research Working Paper
Does Communicating a Numerical Inflation Target Anchor Inflation Expectations? Evidence & Bond Market Implications
Brent Bundick
Andrew Lee Smith
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 continued to drift with news about current inflation, even after the Bank of Japan adopted a numerical inflation target. These empirical findings have implications for the term structure of interest rates in the United States. In a calibrated macro-finance model, we show that the apparent anchoring of inflation expectations implies lower term premiums in longer-term bond yields and decreases the slope of the yield curve.


Download https://doi.org/10.18651/RWP2018-01
Cite this item
Brent Bundick & Andrew Lee Smith, Does Communicating a Numerical Inflation Target Anchor Inflation Expectations? Evidence & Bond Market Implications, Federal Reserve Bank of Kansas City, Research Working Paper RWP 18-1, 01 Jan 2018.
More from this series
JEL Classification:
Subject headings:
Keywords: Monetary Policy; Inflation; Structural Breaks; Term Structure of Interest Rates
For corrections, contact Lu Dayrit ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal