Inflation Expectations as a Policy Tool?

Olivier Coibion, Yuriy Gorodnichenko, Saten Kumar, Mathieu Pedemonte

Chapter in NBER book NBER International Seminar on Macroeconomics 2019 (2020), Kristin Forbes and Pierre-Olivier Gourinchas, organizers
Conference held June 27–28, 2019
Published in May 2020 by Elsevier, Journal of International Economics, volume 124
in NBER Book Series NBER International Seminar on Macroeconomics

We assess the prospects for central banks using inflation expectations as a policy tool for stabilization purposes. We review recent work on how expectations of agents are formed and how they affect their economic decisions. Empirical evidence suggests that inflation expectations of households and firms affect their actions but the underlying mechanisms remain unclear, especially for firms. Two additional limitations prevent policy-makers from being able to actively manage inflation expectations. First, available surveys of firms' expectations are systematically deficient, which can only be addressed through the creation of large, nationally representative surveys of firms. Second, neither households' nor firms' expectations respond much to monetary policy announcements in low-inflation environments. We provide suggestions for how monetary policy-makers could pierce this veil of inattention through new communication strategies as well as the potential pitfalls to trying to do so.

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Document Object Identifier (DOI): 10.1016/j.jinteco.2020.103297