The chapter studies these issues by taking novel approaches in several dimensions. First, it employs data for a large and diverse sample of countries (24 advanced economies and 23 EMDEs) for a period of close to three decades.<sup>10</sup> Second, it analyzes the degree of anchoring of inflation expectations by employing two empirical strategies: a panel regression model and a time-varying coefficients model. The former approach provides an overview of how well expectations are anchored in different country groups and time periods; the latter is useful for tracking how country-specific and time-varying measures of the degree of anchoring have evolved. Third, the chapter examines the determinants of the degree of anchoring of expectations, using a dynamic panel regression framework. Fourth, it complements these empirical exercises with case studies that examine the role of inflation targeting in stabilizing inflation expectations in three EMDEs.

This strategy yields the following major results. First, long-term inflation expectations have declined and become more firmly anchored in the past two decades in advanced economies and EMDEs (Figure 5). However, anchoring in EMDEs remains notably weaker than in advanced economies. This finding is consistent with the view that monetary policy remains less credible in EMDEs than in advanced economies.

Second, long-term inflation expectations in EMDEs are more sensitive to global and domestic shocks than are expectations in advanced economies. However, the sensitivity of EMDE inflation expectations to domestic shocks gradually fell between 2005 and 2012 and has since been mostly stable while their sensitivity to global shocks has fallen slightly since 2000. This contrasts with the experience of advanced economies, where a large drop in the sensitivity of inflation expectations to global shocks in the wake of the global financial crisis followed a steady decline from the late 1990s to the late 2000s, and there was a less pronounced downward trend in sensitivity to domestic shocks.

Third, the institutional and monetary policy environment matters for anchoring inflation expectations, as do the general macroeconomic environment and structural characteristics of the economy. The authors report that the presence of an inflation targeting regime and a rise in central bank transparency are associated with better anchoring of long-term inflation expectations. For EMDEs, lower public debt ratios and greater trade openness are also associated with better anchoring of expectations.

Fourth, case studies of Brazil, Chile, and Poland provide examples of how these factors have worked to anchor inflation expectations. In Brazil, for instance, accommodative fiscal policy and backtracking on central bank transparency for a period may have held back progress on improving the anchoring of inflation expectations. In Chile, a highly transparent central bank, together with a credible macroeconomic framework, appear to have contributed to the central bank’s success in anchoring inflation expectations. And in Poland, the simultaneous adoption of inflation targeting and exchange rate flexibility seems to have helped anchor expectations.

Chapter 5 focuses on the role of another channel for monetary policy transmission that is especially important for EMDEs—the pass-through of changes in the exchange rate to domestic prices. It takes the novel approach of quantifying, in a large sample, the extent to which exchange rate pass-through varies according to the different types of shocks that lead to movements in exchange rates.

> 10 IMF (2016, 2018) and Mehrotra and Yetman (forthcoming) also study inflation expectations in advanced economies and EMDEs.

12