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Losing the Inflation Anchors

Author

Listed:
  • Ricardo Reis

    (London School of Economics)

Abstract
Inflation has an anchor in people's expectations of what itslongrun value will be. If expectations persistently change, then the anchor is adrift; if they differ from the central bank's target, the anchor is lost. This paper uses data on expectations from market prices, from professional surveys, and from the cross-sectional distribution of household surveys to measure shifts in this anchor. The paper's main application is to the Great Inflation in the United States. The data suggest that the anchor started drifting as early as 1967 and that this could have been spotted well before policymakers noticed it. Other applications using expectations data from Brazil, Turkey, South Africa, the United States in the 1970s, and the United States in 2021 confirm the data's usefulness to measure the inflation anchor in real time.

Suggested Citation

  • Ricardo Reis, 2021. "Losing the Inflation Anchors," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 52(2 (Fall)), pages 307-379.
    • Handle: RePEc:bin:bpeajo:v:52:y:2021:i:2021-02:p:307-379
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    File URL: https://www.brookings.edu/articles/losing-the-inflation-anchor/
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    References listed on IDEAS

    as
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    Cited by:

    1. Yoosoon Chang & Ana María Herrera & Elena Pesavento, 2023. "Oil prices uncertainty, endogenous regime switching, and inflation anchoring," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 38(6), pages 820-839, September.
    2. Carl E. Walsh, 2022. "Inflation Surges and Monetary Policy," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 40, pages 39-66, November.
    3. Jane M. Ryngaert, 2023. "Balance of Risks and the Anchoring of Consumer Expectations," JRFM, MDPI, vol. 16(2), pages 1-18, January.
    4. Yoosoon Chang & Fabio Gómez-Rodríguez & Mr. Gee Hee Hong, 2022. "The Effects of Economic Shocks on Heterogeneous Inflation Expectations," IMF Working Papers 2022/132, International Monetary Fund.
    5. Stefan Nagel & Zhen Yan, 2022. "Inflation Hedging on Main Street? Evidence from Retail TIPS Fund Flows," NBER Working Papers 30692, National Bureau of Economic Research, Inc.
    6. Binder, Carola Conces, 2022. "Time-of-day and day-of-week variations in Amazon Mechanical Turk survey responses," Journal of Macroeconomics, Elsevier, vol. 71(C).
    7. Olivier Armantier & Gizem Koşar & Jason Somerville & Giorgio Topa & Wilbert Van der Klaauw & John C. Williams, 2022. "The Curious Case of the Rise in Deflation Expectations," Staff Reports 1037, Federal Reserve Bank of New York.
    8. Meeks, Roland & Monti, Francesca, 2023. "Heterogeneous beliefs and the Phillips curve," Journal of Monetary Economics, Elsevier, vol. 139(C), pages 41-54.
    9. Ignazio Visco, 2023. "Inflation Expectations and Monetary Policy in the Euro Area," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 51(2), pages 111-129, September.
    10. Lena Dräger & Michael J. Lamla, 2024. "Consumers' macroeconomic expectations," Journal of Economic Surveys, Wiley Blackwell, vol. 38(2), pages 427-451, April.
    11. repec:ecb:ecbdps:202424 is not listed on IDEAS
    12. John C. Williams, 2023. "Effective dialogue and well anchored inflation expectations: essential tools for navigating challenging times," BIS Papers chapters, in: Bank for International Settlements (ed.), Central banking in the Americas: Lessons from two decades, volume 127, pages 149-162, Bank for International Settlements.
    13. Nicholas Bamegne Nambie & Philomena Dadzie & Dorcas Oye Haywood-Dadzie, 2023. "Measuring the Effect of Income Inequality, Financial Inclusion, Investment, and Unemployment, on Economic Growth in Africa: A Moderating Role of Digital Financial Technology," International Journal of Economics and Financial Issues, Econjournals, vol. 13(4), pages 111-124, July.
    14. Paul Beaudry & Thomas J. Carter & Amartya Lahiri, 2022. "Looking Through Supply Shocks versus Controlling Inflation Expectations: Understanding the Central Bank Dilemma," Staff Working Papers 22-41, Bank of Canada.

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    More about this item

    Keywords

    US economy; monetary policy; inflation; inflation anchor;
    All these keywords.

    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics
    • N0 - Economic History - - General

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