Modeling the Dynamics of Ination Compensation

This paper investigates the relationship between short-term and long-term in‡ation expectations using daily data on in‡ation compensation. We use a ‡exible econometric model which allows us to uncover this relationship in a data-based manner. We relate our …ndings to the issue of whether in‡ation expectations are anchored, unmoored or contained. Our empirical results indicate no support for either unmoored or …rmly anchored in‡ation expectations. Most evidence indicates that in‡ation expectations are contained. The views expressed in this paper are those of the authors and do not necessarily re‡ect the views of the Federal Reserve Bank of New York or the Federal Reserve System. Markus Jochmann and Gary Koop are Fellows of the Rimini Center for Economic Analysis.