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Fiscal Events and Anchored Inflation Expectations

Author

Listed:
  • Ethan Ilzetzki

    (London School of Economics (LSE)
    Centre for Macroeconomics (CFM)
    Centre for Economic Policy Research (CEPR))

Abstract
With inflation surging worldwide, some commentators have speculated whether inflation expectations have become unanchored. This policy note presents a framework to evaluate whether an inflationary spike is due to temporary shifts in policy or the real economy on one hand, or due to an unanchoring of inflation expectations. The model is a conventional “textbook” model, but accommodates many of the views of unanchored expectations in the existing literature. I then review several economic shocks of the past few years through the lens of the conceptual framework, with a particular focus on fiscal and other policy shocks. I find little to suggest that inflation expectations have become unanchored in the US, the UK, or Japan, although expectations are stubbornly below the central bank’s target in Japan, and above the target in the UK. In contrast, inflation expectations show substantial signs of unanchoring in some emerging market economies, particularly Brazil and Turkey.

Suggested Citation

  • Ethan Ilzetzki, 2024. "Fiscal Events and Anchored Inflation Expectations," Discussion Papers 2410, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:2410
    as

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    File URL: https://www.lse.ac.uk/CFM/assets/pdf/CFM-Discussion-Papers-2024/CFMDP2024-10-Paper.pdf
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    References listed on IDEAS

    as
    1. Francesco Bianchi & Cosmin Ilut, 2017. "Monetary/Fiscal Policy Mix and Agent's Beliefs," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 113-139, October.
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    3. Carlos Carvalho & Stefano Eusepi & Emanuel Moench & Bruce Preston, 2023. "Anchored Inflation Expectations," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(1), pages 1-47, January.
    4. Iván Werning, 2022. "Expectations and the Rate of Inflation," NBER Working Papers 30260, National Bureau of Economic Research, Inc.
    5. Guido Ascari & Lorenza Rossi, 2012. "Trend Inflation and Firms Price‐Setting: Rotemberg Versus Calvo," Economic Journal, Royal Economic Society, vol. 122(563), pages 1115-1141, September.
    Full references (including those not matched with items on IDEAS)

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