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The Dynamics of UK and US Inflation Expectations
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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 expecta
tions 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
find anchored or
unmoored inflation expectations. For the US, contained inflation expectations are found. For the UK, our fi
ndings are not consistent
with the speci
c model of contained inflation expectations presented
here, but are consistent with a broader view of expectations being
constrained by the existence of an inflation target.