2022-06-30-IMF-The_Effects_of_Economic_Shocks_on_Heterogeneous_Inflation_Expectations_59页_6mb

Economic Shocks and Heterogeneous Inflation Expectations

This paper analyzes how different economic shocks impact household inflation expectations using a functional approach. The key findings are:

1. Functional Shocks: Dynamics in inflation expectation distributions are driven by three functional shocks: disagreement (increases spread), level shift (increases average), and ambiguity.

2. Monetary Policy Shocks: Contractionary shocks increase average inflation expectations and reduce disagreement (anchoring effect) during low-inflation periods (but not high-inflation). Gasoline price increases primarily affect the level shift component (increases expectations).

3. Fiscal Policy Shocks: Expansionary government spending shocks raise inflation expectations for both short and medium run. Personal income tax shocks only impact medium-run expectations, suggesting longer-term effects.

4. Gasoline Price Shocks: Surprise price hikes significantly increase inflation expectations for the short-term but increase uncertainty (disagreement) and reduce the share favoring 2% inflation for the medium-term.

5. Policy Implications: Economic policies influence inflation expectations meaningfully, contrary to some prior literature. State-dependent effects and heterogeneity in beliefs are crucial for understanding inflation dynamics, necessitating further investigation.

The novel functional approach effectively captures the distributional aspects of inflation expectations not captured by traditional moments.