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Are long-term inflation expectations important determinants of actual long-term inflation and monetary policy?
Standard analysis of monetary policy is that economic agents’ long-term inflation expectations must be “anchored” to prevent the return of excessive (or, conversely, insufficient) inflation. This assumes that expected long-term inflation is an important determinant of actual long-term inflation, which implies that central banks must react to changes in long-term inflation expectations. But are long-term inflation expectations really a determinant of actual inflation in the long run? Looking at the situations of the United States and the euro zone, we see no significant link between expected long-term inflation, regardless of how it is measured, and actual inflation in the medium term. Anchoring inflation expectations therefore has no effect on inflation in the long run.
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Natixis
Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.
Patrick Artus
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