A simple measure of anchoring for short-run expected inflation in FIRE models

Abstract

We show that the fraction of non-reoptimizing firms that index prices to the inflation target, rather than lagged inflation, provides a simple measure of anchoring for short-run expected inflation in a New Keynesian model with full-information rational expectations. Higher values of the anchoring measure imply less sensitivity of rational inflation forecasts to movements in actual inflation. The approximate value of the model’s anchoring measure can be inferred from observable data generated by the model itself, as given by 1 minus the autocorrelation statistic for quarterly inflation. We show that a shift in the collective indexing behavior of firms allows the model to account for numerous features of evolving U.S. inflation behavior since 1960.