Macroeconomics Seminar - Stefano Eusepi (UT Austin)

Room 315, Level 3, FBE Building, 111 Barry Street, Carlton

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Faisal Sohail

faisal.sohail@unimelb.edu.au

T: +61 3 9035 8139

Title: Anchored Inflation Expectations

Abstract: Because of policy uncertainty long-run inflation beliefs are a state-contingent function of short-run inflation surprises. Expectations are well anchored only when the central bank is credible and long-run beliefs display small and declining sensitivity to short-run forecast errors. Nominal rigidities mean shifts in beliefs induce an endogenous inflation trend, with time-varying persistence and volatility. This feature of our theory of the nominal anchor distinguishes it from common explanations of low-frequency movements in inflation. The model, estimated using only US inflation and short-term forecasts from professional surveys, accurately predicts observed measures of long-term inflation expectations for the US and other countries, including several episodes of poorly anchored expectations.