INFLATION TARGETING AND THE ANCHORING OF INFLATION EXPECTATIONS IN THE WESTERN HEMISPHERE
Abstract
We investigate the extent to which long-run inflation expectations are well anchored in Canada, Chile, and the United States, using a high-frequency event-study analysis. Specifically, we use daily data on far-ahead forward inflation compensation as an indicator of financial market perceptions of inflation risk and the expected level of inflation at long horizons. For the U.S., we find that far-ahead forward inflation compensation reacts significantly to macroeconomic data releases, implying that long-run inflation expectations are not completely anchored. In contrast, the Canadian inflation compensation data does not exhibit significant sensitivity to either Canadian or U.S. macroeconomic news, confirming that inflation targeting in Canada has succeeded in anchoring long-run inflation expectations. Finally, while the requisite data for Chile is available only for a limited sample period (2002-05), our results are consistent with the hypothesis that inflation targeting in Chile has also succeeded in anchoring long-run inflation expectations.
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