Title

Leadership in Groups: A Monetary Policy Experiment

Author(s)

Alan S Blinder Alan Blinder (Princeton University)

John Morgan John Morgan (University of California at Berkeley )

Abstract

We measure the relative contribution of the deviation of real activity from its equilibrium (the gap), "supply-shock" variables, and long-horizon inflation forecasts for explaining the U.S. inflation rate in the post-war period. For alternative specifications for the inflation-driving process and measures of inflation and the gap, we reach a similar conclusion: the contribution of changes in long-horizon inflation forecasts dominates that for the gap and supply-shock variables. Put another way, variation in long-horizon inflation forecasts explains the bulk of the movement in realized inflation. Further, we find evidence that long-horizon forecasts have become substantially less volatile over the sample period, suggesting that permanent shocks to the inflation rate have moderated. Finally, we use our preferred specification for the inflation-driving process to compute a history of model-based forecasts of the inflation rate. For both short and long horizons, these forecasts are close to inflation expectations obtained from surveys.

Creation Date

2007-07

Section URL ID

Paper Number

151

URL

https://gceps.princeton.edu/wp-content/uploads/2017/01/151blinder.pdf

File Function

Jel

E31, E37, E52

Keyword(s)

Suppress

false

Series

3