Shocks to inflation expectations

The consensus among central bankers is that higher inflation expectations can drive up actual inflation. We assess this by devising a novel method for identifying shocks to inflation expectations, estimating a semi-structural VAR where an expectation shock is identified as that which causes measured forecasts to diverge from the rational expectation. Surprisingly, using data for the United States we find that a positive inflation expectation shock is contractionary and deflationary: output, inflation, and interest rates all fall. These results are inconsistent with the standard New Keynesian model, which predicts inflation and interest rate hikes.