Hostname: page-component-6766d58669-fx4k7 Total loading time: 0 Render date: 2026-05-24T12:48:41.299Z Has data issue: false hasContentIssue false
  • English
  • Français

DECOMPOSING U.K. INFLATION EXPECTATIONS USING SURVEY-BASED MEASURES

Published online by Cambridge University Press:  30 July 2013

Sohrab Rafiq
Sohrab Rafiq*
Affiliation:
International Monetary Fund
*
Address correspondence to: Sohrab Rafiq, 700 19th Street, N.W., Washington, DC 20431, USA; e-mail: srafiq@imf.org.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper derives a time-varying model to examine the dynamic interdependencies between realized and expected inflation. The results show inflation expectations at the short and long horizon have been uncorrelated over the past three decades, which is consistent with the anchored inflation expectations hypothesis. There is also little evidence that changes in realized inflation have been the result of self-fulfilling variations in the expectations of economic agents. Despite high commodity prices and above-trend inflation, expectations since the financial crisis in 2008 have not become unhinged from fundamentals.

Keywords

Inflation ExpectationsMonetary PolicyTime VariationSurvey Data

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 7 , October 2014 , pp. 1508 - 1538
Copyright
Copyright © Cambridge University Press 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

References

REFERENCES

Bachmann, R., Berg, T.O., and Sims, E.R. (2012) Inflation Expectations and Readiness to Spend: Cross-Sectional Evidence. NBER working paper 17958.CrossRefGoogle Scholar
Bachmann, R., Elstner, S., and Sims, E.R. (2010) Uncertainty and Economic Activity: Evidence from Business Survey Data. NBER working paper series 16143.CrossRefGoogle Scholar
Barnett, A., Groen, J.J.J., and Mumtaz, H. (2010) Time-Varying Inflation Expectations and Economic Fluctuations in the United Kingdom: A Structural VAR Analysis. Working paper 392, Bank of England.CrossRefGoogle Scholar
Benati, L. (2008) The “Great Moderation” in the United Kingdom. Journal of Monetary Credit and Banking 40, 121–147.CrossRefGoogle Scholar
Bernanke, B. (2007) Inflation Expectations and Inflation Forecasting. Remarks given at the Monetary Economics Workshop of the NBER Summer Institute, Cambridge, MA, July 10.Google Scholar
Bianchi, F., Mumtaz, H., and Surico, P. (2009) The great moderation of the term structure of UK interest rates. Journal of Monetary Economics 56 (6), 856–871.CrossRefGoogle Scholar
Blanchard, O.J. and Gali, J. (2009) Why Are the 2000s so Different from the 1970s? A Structural Interpretation of Changes in the Macroeconomic Effects of Oil Prices. NBER Working Paper 15467.CrossRefGoogle Scholar
Blanchflower, D. and Kelly, R. (2008) Macroeconomic Literacy, Numeracy and the Implications for Monetary Policy. Working paper, Bank of England.Google Scholar
Blanchflower, D.G. and MacCoille, C. (2009) The Formation of Inflation Expectations: An Empirical Analysis for the UK. NBER Working Paper 15388.CrossRefGoogle Scholar
Canova, F., Gambetti, L., and Pappa, E. (2007) The structural dynamics of output growth and inflation: some interest evidence. Economic Journal 117, 167–191.CrossRefGoogle Scholar
Castelnuovo, E. and Surico, P. (2006) The Price Puzzle: Fact or Artefact? Working paper 288, Bank of England.CrossRefGoogle Scholar
Chari, V.V., Christiano, L.J., and Eichenbaum, M. (1998) Expectation traps and discretion. Journal of Economic Theory 2, 462–492.CrossRefGoogle Scholar
Christiano, L., Eichenbaum, M., and Rebelo, S. (2009) When Is the Government Spending Multiplier Large. NBER working paper 15394.CrossRefGoogle Scholar
Clarida, R., Gali, J., and Gertler, M. (2000) Monetary policy rules and macroeconomic stability: Evidence and some theory. Quarterly Journal of Economics 115, 147–180.CrossRefGoogle Scholar
Clark, T.E. (2009) Is the Great Moderation Over? An Empirical Analysis. Federal Reserve Bank Economic Review, Fourth Quarter.Google Scholar
Clark, T.E. and Davig, T. (2008) An Empirical Assessment of the Relationship Among Inflation and Short- and Long-Term Expectations. Research working paper 08-05, Federal Reserve Bank of Kansas.Google Scholar
Clark, T.E. and Davig, T. (2009) Decomposing the Declining Volatility of Long-term Inflation Expectations. Research working paper 09-05, Federal Reserve Bank of Kansas.CrossRefGoogle Scholar
Clark, T.E. and Nakata, T. (2008) Has the behavior of inflation and long-term inflation expectations changed? Federal Reserve Bank of Kansas City, Economic Review First Quarter, 39–51.Google Scholar
Cogley, T., Primiceri, G.E., and Sargent, T.J. (2010) Inflation-gap persistence in the U.S. American Economic Journal: Macroeconomics 2 (1), 43–69.Google Scholar
Cogley, T. and Sargent, T.J. (2005) Drifts and volatilities: monetary policies and outcomes in the post WWII US. Review of Economic Dynamics 8, 262–302.CrossRefGoogle Scholar
Del Negro, M. (2003) Discussion of Cogley and Sargent's “Drifts and Volatilities: Monetary Policy and Outcomes in the Post WWII U.S.” Working paper 2003-26, Federal Reserve Bank of Atlanta.CrossRefGoogle Scholar
Gerlach, P., Hördahl, P., and Moessner, R. (2011) Inflation expectations and the great recession. BIS Quarterly Review, March 2011.Google Scholar
Harrison, R., Mumtaz, H., and Yates, T. (2008) Using Time-Varying VARs to Diagnose the Source of “Great Moderations”: A Monte Carlo Analysis. CDMA conference paper series 0814, University of St. Andrews Centre for Dynamic Macroeconomic Analysis.Google Scholar
Kelly, R. (2008) The Causal Relationship between Inflation and Inflation Expectations in the United Kingdom. Discussion paper 24, External MPC Unit, Bank of England.Google Scholar
Krugman, P. (1998) It's baaack: Japan's slump and the return of the liquidity trap. Brookings Papers on Economic Activity 2, 137–205.CrossRefGoogle Scholar
Leduc, S., Sill, K., and Stark, T. (2007) Self-fulfilling expectations and the inflation of the 1970s: Evidence from the Livingston Survey. Journal of Monetary Economics 54, 433–459.CrossRefGoogle Scholar
Levin, A., Natalucci, F., and Piger, J. (2004) The macroeconomic effects of inflation targeting. Federal Reserve Bank of St. Louis Review 86 (4), 51–80.Google Scholar
Mankiw, N.G. and Reis, R. (2002) Sticky information versus sticky prices: A proposal to replace the new Keynesian Phillips curve. Quarterly Journal of Economics 117, 1295–1328.CrossRefGoogle Scholar
Mankiw, N.G. and Reis, R. (N.D.) Imperfect information and aggregate supply. Handbook of Monetary Economics (in preparation).Google Scholar
Mankiw, N.G., Reis, R., and Wolfers, J. (2004) Disagreement about inflation expectations. NBER Macroeconomics Annual 18, 209–248.CrossRefGoogle Scholar
Mankiw, N.G. and Weinzierl, M.C. (2011) An Exploration of Optimal Stabilisation Policy. NBER working paper 17029.Google Scholar
Mehra, Y.P. and Herrington, C. (2008) On the sources of movements in inflation expectations: A few insights from a VAR model. Federal Reserve Bank of Richmond Economic Quarterly 94 (2), 121–146.Google Scholar
Orphanides, A. and Norden, S. van (2005) The reliability of inflation forecast based on output gap estimates in real time. Journal of Money, Credit and Banking 37 (3), 583–600.CrossRefGoogle Scholar
Piger, J.M. and Rasche, R.H. (2006) Inflation: Do Expectations Trump the Gap? Federal Reserve Bank of St. Louis working paper 2006-013B.CrossRefGoogle Scholar
Potter, Simon M. and Rosenberg, Joshua (2007) Are US Inflation Expectations Anchored, Contained, or Unmoored? Unpublished working paper, Federal Reserve Bank of New York.Google Scholar
Primiceri, G.E. (2005) Time varying structural vector autoregressions and monetary policy. Review of Economic Studies 72, 821–852.CrossRefGoogle Scholar
Rafiq, S. (in press) What do energy prices tell us about U.K. inflation. Economica.Google Scholar
Rotemberg, J.J. and Woodford, M. (1998) An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy: Expanded Version. NBER technical working paper 233.CrossRefGoogle Scholar
Sims, C. (2009) Inflation Expectations, Uncertainty and Monetary Policy. BIS working paper 275. Bank of International Settlements.CrossRefGoogle Scholar
Stock, J.H. and Watson, M.W. (2007) Why Has U.S. Inflation Become Harder to Forecast? Journal of Money, Credit and Banking 39 (1), 3–34.CrossRefGoogle Scholar