May 26, 2006 Robert H. Rasche: Inflation: Do Expectations Trump the Gap?
The seminar will be held in Visitor Centre at 9:15 am. in English language.
Robert H. Rasche
Federal Reserve Bank of St. Louis
Abstract
We measure the relative contribution of the deviation of real activity from its equilibrium (the gap), “supply shock” variables, and long-horizon inflation expectations for explaining the U.S. inflation rate in the post-war period. For alternative specifications for the inflation driving process and measures of inflation and the gap we reach a similar conclusion: the contribution of changes in long-horizon inflation expectations dominates that for the gap and supply shock variables. Put another way, variation in longhorizon inflation expectations explains the bulk of the movement in realized inflation. We also use our preferred specification for the inflation driving process to compute a history of model-based forecasts of the inflation rate. For both short and long horizons these forecasts are close to those observed from surveys.