This paper analyzes the relation between the inflation expectations formed by economic agents and macro variables. The house price variable and survey data for inflation expectations and included in the analysis in addition to output growth, inflation...
This paper analyzes the relation between the inflation expectations formed by economic agents and macro variables. The house price variable and survey data for inflation expectations and included in the analysis in addition to output growth, inflation, and the interest rate to analyze the actual relation between agents' inflation expectations and the housing market. Moreover, comparing the results of the U.S. to those of Korea, we additionally discuss the similarities of the relations between agents' inflation expectations and macro-variables in the two countries. We find that the positive inflation expectations shocks increase the real GDP growth and the CPI inflation. This finding implies that the inflation expectations shock is similar to the aggregate demand shock. The response of house prices in Korea is positive to the positive inflation expectations shock which can be interpreted that the positive inflation expectations reduce the real interest rate and increases the demand for housing. In both countries, house price shocks have significant effects on inflation expectations and current inflation. We also find that the relations between the inflation expectations and macro-variables are reinforced by the recent inflation hike after the Covid-19. These results imply that policy makers need to pay close attention to the change of economic agents' behavior for policy effectiveness by analyzing from various angles about the relations among macro-varibles including inflation expectations.