Question

What are anchored inflationary expectations and how do they reduce the cost of an adverse inflation shock? (Brief Answer)

Answer 1

Anchored inflationary expectations imply a muted response of inflation to a highly negative output gap. However long lasting negative gap episode gradually induces a moderate but persistent decline in long run inflation expectations.

Whether the effect of the positive inflation expectations shock differ from those of an adverse supply shock. This includes assessing the role of positive aggregate demand shock and comparing it with those of the positive inflation expection shock and an adverse aggregate supply shock.