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The Role of Expectations in Changed Inflation Dynamics

Author

Listed:
  • Damjan Pfajfar

    (Federal Reserve Board)

  • Damjan Pfajfar

    (Federal Reserve Board)

Abstract
The Phillips curve has been much flatter in the past 20 years than in the preceding decades. We consider two hypotheses. One is that prices at the microeconomic level are stickier than they used to be. The other is that expectations of firms and households about future inflation are now less well informed by macroeconomic conditions. We use inflation expectations from surveys to help distinguish between our two hypotheses empirically.We find that reduced attentiveness can, in some cases, account for three-fourths of the reduction in the sensitivity of inflation to economic conditions in recent decades.

Suggested Citation

  • Damjan Pfajfar & Damjan Pfajfar, 2022. "The Role of Expectations in Changed Inflation Dynamics," International Journal of Central Banking, International Journal of Central Banking, vol. 18(1), pages 199-238, March.
    • Handle: RePEc:ijc:ijcjou:y:2022:q:1:a:5
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    References listed on IDEAS

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    Cited by:

    1. Siena Daniele, & Zago Riccardo., 2021. "Job Polarization and the Flattening of the Price Phillips Curve," Working papers 819, Banque de France.
    2. Philippe Andrade & Jordi Gali & Hervé Le Bihan & Julien Matheron, 2021. "Should the ECB Adjust Its Strategy in the Face of a Lower r*?," Working Papers 22-1, Federal Reserve Bank of Boston.
    3. Aguiar-Conraria, Luís & Martins, Manuel M.F. & Soares, Maria Joana, 2023. "The Phillips curve at 65: Time for time and frequency," Journal of Economic Dynamics and Control, Elsevier, vol. 151(C).
    4. Alexander Doser & Ricardo Nunes & Nikhil Rao & Viacheslav Sheremirov, 2023. "Inflation expectations and nonlinearities in the Phillips curve," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 38(4), pages 453-471, June.
    5. McNeil, James, 2023. "Monetary policy and the term structure of inflation expectations with information frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 146(C).

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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