Staff Working Paper No. 1,109
By Natalie Burr
This paper studies how monetary policy impacts inflation expectations in the United Kingdom. Using higher moments of the distribution of inflation expectations, I construct a summary measure of expectations for households, firms, professional forecasters and financial markets. In a Bayesian VAR identified using a high frequency-identified monetary policy shock series, I find that a monetary policy tightening causes significant variation in the response of inflation expectations across groups: firms’ and financial market median expectations fall, while households’ inflation expectations rise. I document that monetary policy decisions act as a stabilisation mechanism by reducing the dispersion of expectations 12–18 months following a shock.
Do inflation expectations respond to monetary policy? An empirical analysis for the United Kingdom
