Inflationtargetingdoesnotanchorinflationexpectations.pdf

BPEA Conference Draft, September 10-11, 2015 Inflation targeting does not anchor inflation expectations: Evidence from firms in New Zealand Saten Kumar, Auckland University of Technology Hassan Afrouzi, University of Texas at Austin Olivier Coibion, University of Texas at Austin and NBER Yuriy Gorodnichenko, University of California, Berkeley and NBER DO NOT DISTRIBUTE – EMBARGOED UNTIL 1:00 PM EST ON 9/10/2015 Inflation Targeting Does Not Anchor Inflation Expectations: Evidence from Firms in New Zealand Saten Kumar Hassan Afrouzi Auckland University of Technology UT Austin Olivier Coibion Yuriy Gorodnichenko UT Austin and NBER UC Berkeley and NBER This Draft: August 31, 2015 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. JEL: E3, E4, E5 Keywords: inflation expectations, survey, anchoring We are grateful to Graham Howard, Rochelle Barrow