Abstract:
This study provides evidence that 10-year-ahead inflation expectations adapt very slowly to
changes in realized inflation. This evidence derives primarily from yields on 10-year government
bonds in a sample of OECD countries, including inflation-indexed bonds where they are available.
The study examines both the cross-country and time-series behavior of interest rates and inflation
rates. For the United States, additional evidence is provided from a survey of 10-year inflation
expectations held by market participants. This study does not present a theoretical model of
expectations formation. However, long memory of the type documented in this study would be
implied by a model of multiple inflationary regimes in which agents base their probability distributions
of future regimes on past inflationary experience.
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