Articlebronze2015

Inflation Targeting Does Not Anchor Inflation Expectations: Evidence from Firms in New Zealand

Saten Kumar · Hassan Afrouzi · Olivier Coibion · Yuriy Gorodnichenko

250 citations0/0 files storedBrookings Papers on Economic Activity

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Monetary Policy and Economic Impact Forecasting Techniques and Applications Economic theories and models

Abstract

We study the (lack of) anchoring of inflation expectations in New Zealand using a new survey of firms.Managers of these firms display little anchoring of inflation expectations, despite twenty-five years of inflation targeting by the Reserve Bank of New Zealand, a fact which we document along a number of dimensions.Managers are unaware of the identities of central bankers as well as central banks' objectives, and are generally poorly informed about recent inflation dynamics.Their forecasts of future inflation reflect high levels of uncertainty and are extremely dispersed as well as volatile at both short and long-run horizons.Similar results can be found in the U.S. using currently available surveys as shown in Binder (2015).

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References

1972Expectations and the neutrality of money 2003Implications of rational inattention 2002Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve 2008Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence 2003Macroeconomic Expectations of Households and Professional Forecasters 2015Information Rigidity and the Expectations Formation Process: A Simple Framework and New Facts 2009Optimal Sticky Prices under Rational Inattention 2012What Can Survey Forecasts Tell Us about Information Rigidities?

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