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MNI INTERVIEW: Models Of Inflation Expectations Need Refining

(MNI) London

Central banks should place weight on the distribution of inflation expectations, a former head of BOE modelling tells MNI.

Central banks should incorporate a more sophisticated model of inflation expectations into their projections, a former head of modelling at the Bank of England told MNI, noting how the distribution of expectations shifted to the upside well before the current surge in headline inflation, even as average expectations remained relatively subdued.

While some economists, including the Federal Reserve Board’s Jeremy Rudd, have questioned the usefulness of inflation expectations, whose failure to rise sharply after the Covid pandemic reinforced arguments against more rapid tightening of monetary policy, research by Francesca Monti, now a professor at Universite Catholique de Louvain, together with the IMF’s Roland Meeks has produced empirical evidence that variations in expectations feed through to headline inflation.

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Central banks should incorporate a more sophisticated model of inflation expectations into their projections, a former head of modelling at the Bank of England told MNI, noting how the distribution of expectations shifted to the upside well before the current surge in headline inflation, even as average expectations remained relatively subdued.

While some economists, including the Federal Reserve Board’s Jeremy Rudd, have questioned the usefulness of inflation expectations, whose failure to rise sharply after the Covid pandemic reinforced arguments against more rapid tightening of monetary policy, research by Francesca Monti, now a professor at Universite Catholique de Louvain, together with the IMF’s Roland Meeks has produced empirical evidence that variations in expectations feed through to headline inflation.

Keep reading...Show less