Search Results

You are looking at 1 - 2 of 2 items for :

  • "inflation expectation decrease" x
Clear All
Bertrand Gruss, Mrs. Sandra V Lizarazo Ruiz, and Mr. Francesco Grigoli

third, we compute the average of the interest rate shock in absolute value (|i t -i t-1 | = 77 basis points) and the average response of inflation expectation dispersion. In Figure 8 , we plot the average inflation expectation dispersion following an average interest rate shock and compare it to the rescaled empirical counterpart. The results indicate that the dispersion of inflation expectation decreases as the horizon gets larger, in line with the empirical findings, but the magnitude of the effect is smaller. Figure 8: Average Response of Inflation

Bertrand Gruss, Mrs. Sandra V Lizarazo Ruiz, and Mr. Francesco Grigoli
Anchoring of inflation expectations is of paramount importance for central banks’ ability to deliver stable inflation and minimize price dispersion. Relying on daily interest rates and inflation forecasts from major financial institutions in the United States, we calculate monetary policy surprises of individual analysts as the unexpected changes in the federal funds rate before the meetings of the Federal Reserve Board. We then assess the effect of monetary policy surprises on the dispersion of inflation expectations, a proxy for the extent of anchoring, which is based on the same analysts’ inflation projections submit-ted after the Fed meetings. With an identification strategy that hinges on a tight window around the Fed meetings, we find that monetary policy surprises lead to an increase in the dispersion of inflation expectations up to nine months after the policy meeting. We rationalize these results with a partial equilibrium model that features rational expectations and sticky information. When we allow the degree of information rigidity to depend on the realization of firm-specific shocks, the theoretical results are qualitatively consistent and quantitatively close to the empirical evidence.