Fitting Observed Inflation Expectations - Federal Reserve Bank of New York

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Staff Reports

Fitting Observed Inflation Expectations

November 2010 Number 476

JEL classification: C32, E21

Authors: Marco Del Negro and Stefano Eusepi

This paper provides evidence on the extent to which inflation expectations generated by a standard Christiano et al. (2005)/Smets and Wouters (2003)–type DSGE model are in line with what is observed in the data. We consider three variants of this model that differ in terms of the behavior of, and the public’s information on, the central banks’ inflation target, allegedly a key determinant of inflation expectations. We find that: 1) time-variation in the inflation target is needed to capture the evolution of expectations during the post-Volcker period; 2) the variant where agents have imperfect information is strongly rejected by the data; 3) inflation expectations appear to contain information that is not present in the other series used in estimation; and 4) none of the models fully captures the dynamics of this variable.

Available only in PDF pdf

68 pages / 527 kb

For a published version of this report, see Marco Del Negro and Stefano Eusepi, "Fitting Observed Inflation Expectations," Journal of Economic Dynamics and Control 35, no. 12 (December 2011): 2105-31.

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