simon m potter : improving survey measures of inflation expectations speech by mr simon m potter, executive vice president of the federal reserve bank of new york, at the forecasters club of new york, new york city, 30 march 2011. wilbert van der klaauw, giorgio topa, robert rich, olivier armantier, basit zafar and joseph tracy. the results from the new york fed – american life panel survey i will discuss today reflect data collected through mid - march 2011. papers containing more detail on the research i have summarized today can be found on the new york fed website. * * * good afternoon. it is a pleasure to be here today to talk with you about some of the new york fed ’ s ongoing research on the measurement of household inflation expectations. the views expressed are mine and do not necessarily reflect those of the federal reserve bank of new york or the federal reserve system. that said, i want to acknowledge my colleagues in the research group who have pushed our research on inflation expectations forward. expectations, and in particular inflation expectations, play a key role in the conduct of modern monetary policy. expectations drive people ’ s behavior by influencing a wide range of economic decisions such as saving, investment, purchases of durable goods and wage negotiations. these decisions in turn affect real economic activity and actual inflation. as a result, inflation expectations represent an important link in the monetary transmission mechanism – especially through the term structure of interest rates – and greatly influence the central bank ’ s ability to achieve price stability. it is crucial for a central bank to monitor inflation expectations, making sure that they remain well anchored and consistent with policy objectives. since the economy is constantly buffeted by unanticipated shocks, short - term inflation expectations should reflect the effects of these shocks. for example, if energy prices increase suddenly due to a supply disruption, short - term inflation expectations should move up. this is completely consistent with medium - term price stability, if at the same time, forward inflation expectations – that is, expectations of inflation for after the supply disruption ends – do not move. this stability of longer - term inflation expectations in the face of movements in short - term inflation expectations is the hallmark of sound, effective and credible monetary policy. in standard macroeconomic models it is trivial to measure inflation expectations : under the rational expectations assumption, any economic agent in the model could produce the unique inflation expectation for any horizon. in the real world, central banks must rely on various indirect approaches to measure

to have picked up further recently, neither is this expansion a flash in the pan. that is positive news for the australian economy, too. noticing that change in momentum required economic forecasters to be alert to the right indicators, and have the right framework for thinking about the signals these indicators send. nothing is ever clear - cut. there are always uncertainties about the data. there are times when you have to be willing to make a call, because waiting until you are 100 per cent sure things have changed means waiting too long. and that means taking a view and being willing to evolve that view as new data come in, just as we always have done. thank you for your time. bibliography rba ( 2015 ), ‘ box c : the effects of the fall in oil prices february, pp 46 – 48. ’, statement on monetary policy, rba ( 2017 ), ‘ the recent pick - up in global merchandise trade policy, august, pp 13 – 14. 9 / 10 ’, statement on monetary bis central bankers'speeches rudebusch g ( 2016 ), ‘ will the economic recovery die of old age ’, federal reserve bank of san francisco. 1 a sentence along these lines was included in several of the bank ’ s statements on monetary policy over this period. see also rba ( 2015 ). 2 the colouring of the words as red for negative and blue for positive has been done manually, based on the consensus of a number of colleagues. standard packages for sentiment analysis do not handle the nuanced communications of central banks and international agencies particularly well. it should also be noted that some nouns that are coded as positive ( such as ‘ growth ’ or ‘ investment ’ ) can sometimes be mentioned in negative contexts, for example with verbs such as ‘ slowed ’ or ‘ declined ’. that is certainly the case in the april 2016 issue. the cited proportions of words coded positive or negative does not include common ‘ stop words ’ such as ‘ the ’, ‘ and ’ and ‘ with ’. 10 / 10 bis central bankers'speeches