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Abstract:
This study provides evidence that 10-year-ahead inflation expectations adapt very
slowly to changes in realized inflation. This evidence derives primarily from yields on
10-year government bonds in a sample of OECD countries, including
inflation-indexed bonds where they are available. The study examines both the
cross-country and time-series behavior of interest rates and inflation rates.
For the United States, additional evidence is provided from a survey of 10-year
inflation expectations held by market participants. This study does not
present a theoretical model of expectations formation. However, long memory of
the type documented in this study would be implied by a model of multiple
inflationary regimes in which agents base their probability distributions of
future regimes on past inflationary experience.
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