When the Message Meets the Moment: State-Dependent Effects of Monetary Policy Surprises on the Term Structure of Inflation Expectations

Abstract

Anchoring inflation expectations is central to effective monetary policy, yet relatively little empirical work explores how the term structure of expectations responds to different types of monetary surprises across inflationary regimes. Building on the identification strategy of Jarociński and Karadi (2020), which separates monetary policy surprises into pure rate shocks and central bank information shocks, I examine how each type of shock affects the term structure of survey-based inflation expectations (1–30 years) using a state-dependent local projection framework that incorporates Shapiro's (2024) decomposition of inflation into supply- and demand-driven components. While conventional monetary policy shocks predominantly influence short- and medium-term expectations, central bank information shocks exhibit broader and more persistent effects across the entire horizon — and supply-driven inflation regimes amplify the response of expectations, whereas demand-driven regimes attenuate them. The findings suggest that the effectiveness of monetary policy, particularly forward guidance, depends not only on the nature of the policy innovation but also on the underlying sources of inflation.

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