Working Paper Series no. 511: Economic Policy Uncertainty and Inflation Expectations

Abstract

Theory and evidence suggest that in an environment of well-anchored expectations, temporary economic news or shocks should not affect agents' expectations of inflation in the long term. Our estimated structural VARs show that both long- and short-term inflation expectations are sensitive to policy-related uncertainty shocks. While economic activity contracts, long-term inflation expectations raise in response to such shocks. These results suggest that observed uncertainty about the stance and perceived effectiveness of policy raises concerns about future inflation and entails additional risks to central banks' hard-won inflation credibility.

Klodiana Istrefi and Anamaria Piloiu
October 2014

Classification JEL : E02, E31, E58, E63, P16

Keywords : Policy uncertainty; central banks; inflation expectations; structural VAR