Finance and Economics Discussion Series (FEDS)
September 2024
Disagreement About the Term Structure of Inflation Expectations
Hie Joo Ahn and Leland E. Farmer
Abstract:
We develop a model of the individual term structure of inflation expectations across forecasting horizons. Using the Survey of Professional Forecasters, we decompose disagreement about inflation expectations into individuals’ long-term beliefs, private information, and public information. We find that in normal times, long-horizon disagreement is predominantly driven by individuals’ long-term beliefs, while short-horizon disagreement stems from private information. During economic downturns, heterogeneous reactions to public information become a key driver of disagreement at all horizons. When forecasters disagree about public information, monetary policy exhibits a delayed response and a price puzzle emerges, underscoring the importance of anchoring inflation expectations.
Keywords: Inflation Expectations, Term Structure, Disagreement, Monetary Policy
DOI: https://doi.org/10.17016/FEDS.2024.084
PDF: Full Paper
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