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Information Flow and Expected Inflation: An Empirical Analysis

Cornell, Bradford (2015) Information Flow and Expected Inflation: An Empirical Analysis. Social Science Working Paper, 1413. California Institute of Technology , Pasadena, CA. (Unpublished)

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This paper begins by ranking the absolute value of changes in the 10-year break- even inflation (BEI) calculated using 10-year Treasury notes and 10-year TIPS. Next, a news search is conducted to determine what inflation related information was released on days when the change in the BEI was greatest. The goal of the analysis is not only to see what information is associated with large changes in the BEI, but also to gain insight into the extent to which market participants accept the three competing theories of price determination: the classic monetary theory, the fiscal theory, and a “Keynesian” model that combines central bank setting of interest rates with the Philips curve. I find that there was no mention of the money supply, the demand for money, or the rate of monetary growth on any of the days on which there was a large change in the BEI. Further, I find that there was only one mention of the impact of government debt on a day where the BEI changed substantially. In comparison, there were 53 news items on large change days that either explicitly discussed Federal Reserve policy regarding interest rates or focused on the interaction between Fed policy, economic activity and expected inflation. This suggests that market participants accept the “Keynesian” model of price determination.

Item Type:Report or Paper (Working Paper)
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URLURL TypeDescription ItemPublished Article
Group:Social Science Working Papers
Subject Keywords:Inflation, Monetary Policy, Interest Rates
Series Name:Social Science Working Paper
Issue or Number:1413
Record Number:CaltechAUTHORS:20170726-105408407
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:79410
Deposited By: Hanna Storlie
Deposited On:07 Aug 2017 21:34
Last Modified:03 Oct 2019 18:19

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