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The dynamics of UK and US inflation expectations

Koop, G.M. (2006) The dynamics of UK and US inflation expectations. Working paper. University of Strathclyde. (Unpublished)

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Abstract

This paper investigates the relationship between short term and long term inflation expectations in the US and the UK with a focus on inflation pass through (i.e. how changes in short term expectations affect long term expectations). An econometric methodology is used which allows us to uncover the relationship between inflation pass through and various explanatory variables. We relate our empirical results to theoretical models of anchored, contained and unmoored inflation expectations. For neither country do we �nd anchored or unmoored inflation expectations. For the US, contained inflation expectations are found. For the UK, our �ndings are not consistent with the speci�c model of contained inflation expectations presented here, but are consistent with a more broad view of expectations being constrained by the existence of an inflation target.