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A0614
Title: Anchoring long-run inflation expectations in a panel of professional forecasters Authors:  Sebastian Rast - De Nederlandsche Bank (Netherlands) [presenting]
Leonardo Melosi - Federal Reserve Bank of Chicago (United States)
Jonas Fisher - Federal Reserve Bank of Chicago (United States)
Abstract: Panel data from the U.S. Survey of Professional Forecasters are used to estimate a model of individual forecaster behavior in an environment where inflation follows a trend-cycle time series process. Our model allows us to estimate the sensitivity of forecasters' long-run expectations to incoming inflation and news about future inflation, and measure the coordination of beliefs about future inflation. We use our model of individual forecasters to study average long-run inflation expectations. Short-term changes in inflation have small effects on average expectations; the sensitivity to news is over twice as large but is still relatively small. These findings provide a partial explanation for why the anchoring and subsequent de-anchoring of average inflation expectations from 1991 to 2020 were such long-lasting episodes. Our model suggests coordination of beliefs also played a role, slowing down but not preventing the pull on average expectations from inflation from running persistently below target. We apply our model to the case of a U.S. central banker setting policy in September 2021. Our results suggest the high inflation readings of mid-2021 would have to be followed by overshooting of the Fed's target generally at the high end of the Fed's Summary of Economic Projections to re-anchor long-term expectations at their pre-Great Recession level.