A1852
Title: The macroeconomic effects of inflation expectations: The distribution matters
Authors: Alessandro Celani - De Nederlandsche Bank (Netherlands) [presenting]
Guido Ascari - De Nederlandsche Bank and University of Pavia (Netherlands)
Paolo Bonomolo - Sveriges Riksbank (Sweden)
Abstract: A monetary policy BVAR augmented with heterogeneous beliefs explores the macroeconomic effects of shocks to the short-term inflation expectation distribution. Throughout a comprehensive density impulse response function analysis, the importance of accounting for the whole expectation distribution is shown. Dispersion shocks are recessionary, via the effects on consumer sentiment, and the effects are sharper when the shock mass is condensed on the tails. Specifically, left-tail perturbations account for the largest effect of expectation shocks on macroeconomic fluctuations. Furthermore, the results show that the (not so) obvious benefits obtained by anchoring the inflation expectation consensus might be completely overthrown in the presence of excessive dispersion, a feature that central banks should take into account. The empirical evidence is among the first to unveil the effects of diversity in beliefs in the study of macroeconomic dynamics.
