Olivier Coibion, Yuriy Gorodnichenko, Michael Weber, 19 March 2021

Households in advanced economies are quite uninformed about inflation. Does this mean that they ignore inflation their economic decisions? This column uses a randomised control trial, a large-scale survey, and spending data to show that the answer is ‘no’. When households change their inflation expectations, this causally alters their spending decisions. This suggests communication strategies that meaningfully impact household expectations can also be expected to affect their decisions. 

Ethan Ilzetzki, 09 February 2021

Over the past year, concerns about inflation have reappeared. This column presents evidence on inflation expectations from the January 2021 survey by the Centre for Macroeconomics. The panel of experts is split between those predicting that UK inflation will be roughly at its current target and those believing that inflation will be above target in the upcoming decade. A smaller minority worry that the UK growth rate will be too low for the Bank of England to stimulate inflation. Beyond the growth rate of the economy, additional factors that panellists are monitoring to project inflation include the effects of Brexit, rising public debts, and global factors.

Francesco Corsello, Stefano Neri, Alex Tagliabracci, 05 November 2019

Concerns about the anchoring of long-term inflation expectations to the ECB Governing Council’s aim have re-emerged since early 2019. Using data from the ECB’s Survey of Professional Forecasters, this column argues that long-term inflation expectations have de-anchored from the ECB’s inflation objective. They have not returned to the levels that prevailed before the 2013-14 period of disinflation, and their distribution is still skewed towards lower inflation levels. Moreover, long-term expectations have become sensitive to short-term ones and to negative inflation surprises. 

Olivier Coibion, Yuriy Gorodnichenko, Tiziano Ropele, 05 March 2019

With nominal short-term interest rates close to their effective lower bound, monetary policies partly operate through changing the inflation expectations. This column analyses the causal effect of inflation expectations on firms’ economic decisions in Italy. Higher inflation expectations on the part of firms leads them to raise their prices, increase their utilisation of credit, and reduce their employment. But when policy rates are constrained by the effective lower bound, expansionary effects are stronger, leading firms to raise their prices more and no longer reduce their employment.

Yossi Saadon, Nathan Sussman, 31 October 2018

Global integration has increased rapidly over recent decades, leaving basic theories of exchange rate equilibrium ripe for reconsideration. This column tests two such theories – purchasing power parity and uncovered interest rate parity – using the case of the advanced, small open economy of Israel and the US. The results show that when the necessary conditions are met, the purchasing power parity and uncovered interest rate parity relationships continue to hold in the short run. 

Alfonso Rosolia, 14 September 2018

Given the role firms play in the transmission of monetary policy decisions, it is useful to understand how they form their inflation expectations. The column uses data from Italy to show that firms are attentive to the economic environment, even if they are not completely aware of the latest developments. They are also able to extract relevant information to update their expectations from ECB communications.

Elisabeth Falck, Mathias Hoffmann, Patrick Hürtgen, 06 November 2017

Existing theoretical and empirical evidence suggests that less expansionary monetary policies lead to lower inflation and dampened inflation expectations. This column considers how the dispersion of inflation expectations can affect this relationship. The results show that an increase in the policy rate can give rise to higher inflation in the short run if professional inflation forecasts differ widely. These findings highlight the importance of considering the amount of agreement about inflation expectations in monetary policy decision-making.

Hassan Afrouzi, Olivier Coibion, Yuriy Gorodnichenko, Saten Kumar, 13 October 2015

The importance of the general public’s inflation expectations is increasingly being emphasised, but surveys of firms’ expectations are notably absent. This column explores the extent to which inflation expectations of firms in New Zealand are anchored. The findings indicate that managers show little anchoring of inflation expectations, despite 25 years of inflation targeting by the central bank. Most managers depend to a large extent on their personal shopping experience to make inferences about aggregate inflation.

Nathan Sussman, Osnat Zohar, 16 September 2015

The 2014 decline in oil prices lowered short-run inflation. Before the Global Crisis, the medium-term correlation between oil prices and inflation was weak, but it has become much stronger since the onset of the Crisis. This column suggests that following the onset of the Crisis, inflation expectations reacted quite strongly to global demand conditions and oil supply shocks. The public’s belief in the ability of monetary authorities to stabilise inflation at the medium-term horizon has deteriorated.

Carin van der Cruijsen, David-Jan Jansen, Jakob de Haan, 23 August 2015

Central banks have typically targeted their communication at financial markets. Increasingly, however, many have started actively communicating with the general public. Using Dutch survey data, this column finds that the public’s knowledge of monetary policy objectives is far from perfect, and varies widely across respondents. Those with a greater understanding of ECB objectives tend to form more realistic inflation expectations. Central banks seeking to target the general public must take account of discrepancies in households’ knowledge of and interest in monetary policy.

Alberto Cavallo, Guillermo Cruces, Ricardo Perez-Truglia, 10 November 2014

Although central banks have a natural desire to influence household inflation expectations, there is no consensus on how these expectations are formed or the best ways to influence them. This column presents evidence from a series of survey experiments conducted in a low-inflation context (the US) and a high-inflation context (Argentina). The authors find that dispersion in household expectations can be explained by the cost of acquiring and interpreting inflation statistics, and by the use of inaccurate memories about price changes of specific products. They also provide recommendations for central bank communication strategies. 

Shusaku Nishiguchi, Jouchi Nakajima, Kei Imakubo, 02 May 2014

Inflation expectations are not fully captured with a single number. One important aspect is the degree of "disagreement" or "dispersion" in such expectations. This column discusses how the distribution of Japanese households' medium-horizon inflation expectations evolved using survey data. As prices have been rising since 2013, the expectations distribution showed a decrease in respondents expecting deflation or high inflation, and there was a substantial increase in respondents expecting moderate inflation.

Stefan Gerlach, Alberto Giovannini, Cédric Tille, 17 July 2009

What lessons should central bankers take away from the financial crisis? This column summarises concerns about macro-prudential regulation, inflation expectations, and the interaction between monetary policy and financial regulation


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