Anchored Inflation Expectations

We develop a theory of low-frequency movements in inflation expectations, and use it to
interpret joint dynamics of inflation and inflation expectations for the United States and
other countries over the post-war period. In our theory long-run inflation expectations are
endogenous. They are driven by short-run inflation surprises, in a way that depends on
recent forecasting performance and monetary policy. This distinguishes our theory from
common explanations of low-frequency properties of inflation. The model, estimated
using only inflation and short-term forecasts from professional surveys, accurately
predicts observed measures of long-term inflation expectations and identifies episodes
of unanchored expectations.