Search Results
Working Paper
A New Model of Inflation, Trend Inflation, and Long-Run Inflation Expectations
A knowledge of the level of trend inflation is key to many current policy decisions, and several methods of estimating trend inflation exist. This paper adds to the growing literature which uses survey-based long-run forecasts of inflation to estimate trend inflation. We develop a bivariate model of inflation and long-run forecasts of inflation which allows for the estimation of the link between trend inflation and the long-run forecast. Thus, our model allows for the possibilities that long-run forecasts taken from surveys can be equated with trend inflation, that the two are completely ...
Discussion Paper
Inflation Expectations in Times of COVID-19
As an important driver of the inflation process, inflation expectations must be monitored closely by policymakers to ensure they remain consistent with long-term monetary policy objectives. In particular, if inflation expectations start drifting away from the central bank’s objective, they could become permanently “un-anchored” in the long run. Because the COVID-19 pandemic is a crisis unlike any other, its impact on short- and medium-term inflation has been challenging to predict. In this post, we summarize the results of our forthcoming paper that makes use of the Survey of Consumer ...
Journal Article
Is the Last Mile More Arduous?
US inflation surged starting in spring 2021, with Consumer Price Index (CPI) inflation reaching a 40-year high of 9 percent in mid-2022. Together with improving supply-chain conditions, policy tightening by the Fed decreased inflation to within 1 to 2 percentage points of its 2 percent target by late 2023 without a significant increase in unemployment. However, concerns have been raised that the last mile of disinflation to reduce inflation consistently to its 2 percent target will be more arduous than the previous miles. Close examination of such concerns indicates that they do not receive ...
Speech
The U.S. economic outlook and the implications for monetary policy
Remarks at Bank Indonesia–Federal Reserve Bank of New York Joint International Seminar, Bali Indonesia.
Discussion Paper
Have Consumers’ Long-Run Inflation Expectations Become Un-Anchored?
With the recent surge in inflation since the spring there has been an increase in consumers’ short-run (one-year ahead) and, to a lesser extent, medium-run (three-year ahead) inflation expectations (see Survey of Consumer Expectations). Although this rise in short- and medium-run inflation expectations is relevant for policymakers, it does not provide direct evidence about “un-anchoring” of long-run inflation expectations. Roughly speaking, inflation expectations are considered un-anchored when long-run inflation expectations change significantly in response to developments in inflation ...
Working Paper
The Expectations of Others
Based on a framework of memory and recall that accounts for social networks, we provide conditions under which social networks can amplify expectations. We provide evidence for several predictions of the model using a novel dataset on inflation expectations and social network connections: Inflation expectations in the social network are statistically significantly, positively associated with individual inflation expectations; the relationship is stronger for groups that share common demographic characteristics, such as gender, income, or political affiliation. An instrumental variable ...
Working Paper
Anchored Inflation Expectations and the Slope of the Phillips Curve
We estimate a New Keynesian Phillips curve that allows for changes in the degree of anchoring of agents' subjective inflation forecasts. The estimated slope coefficient in U.S. data is stable over the period 1960 to 2019. Out-of-sample forecasts with the model resolve both the "missing disinflation puzzle" during the Great Recession and the "missing inflation puzzle" during the subsequent recovery. Using a simple New Keynesian model, we show that if agents solve a signal extraction problem to disentangle transitory versus permanent shocks to inflation, then an increase in the policy rule ...
Working Paper
Inflation Expectations and Recovery from the Depression in 1933: Evidence from the Narrative Record
This paper uses the historical narrative record to determine whether inflation expectations shifted during the second quarter of 1933, precisely as the recovery from the Great Depression took hold. First, by examining the historical news record and the forecasts of contemporary business analysts, we show that inflation expectations increased dramatically. Second, using an event-studies approach, we identify the impact on financial markets of the key events that shifted inflation expectations. Third, we gather new evidence--both quantitative and narrative--that indicates that the shift in ...
Working Paper
Maintaining the Anchor: An Evaluation of Inflation Targeting in the Face of COVID-19
This paper provides evidence that inflation targeting delivered well-anchored inflation expectations during the post-2020 inflation surge. Using a macroeconomic model, we first illustrate how long-term nominal interest rates respond to an unexpected burst of inflation under both anchored and unanchored inflation expectations. Then, we evaluate these predictions using high-frequency financial market data from nine advanced economies. Specifically, we examine whether inflation expectations embedded in asset prices remained anchored as inflation climbed in the aftermath of the pandemic. Our ...
Speech
The National and Local Economic Outlook: An Update--Remarks at the University of Bridgeport, Bridgeport, Connecticut.
Remarks at the University of Bridgeport, Bridgeport, Connecticut.