Does Communicating a Numerical Inflation Target Anchor Inflation Expectations? Evidence & Bond Market Implications

January 12, 2018
By Brent Bundick, Research and Policy Advisor , A. Lee Smith, Research and Policy Advisor


Research Working PaperCommunicating a longer-run inflation objective helped anchor inflation expectations in the United States but not in Japan.

High-frequency empirical evidence suggests that inflation expectations in the United States became better anchored after the Federal Reserve began communicating a numerical inflation target. Using an event-study approach, we find that forward measures of inflation compensation became unresponsive to news about current inflation after the adoption of an explicit inflation target. In contrast, we find that forward measures of nominal compensation in Japan continued to drift with news about current inflation, even after the Bank of Japan adopted a numerical inflation target. These empirical findings have implications for the term structure of interest rates in the United States. In a calibrated macro-finance model, we show that the apparent anchoring of inflation expectations implies lower term premiums in longer-term bond yields and decreases the slope of the yield curve.

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RWP 18-01, January 2018

JEL Classification: E31, E52, E58

Article Citation

  • Bundick, Brent, and A. Lee Smith. “Does Communicating a Numerical Inflation Target Anchor Inflation Expectations? Evidence and Bond Market Implications.” Federal Reserve Bank of Kansas City, Research Working Paper Series 18-01, January. Available at https://doi.org/10.18651/RWP2018-01

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