Nonlinearities With Deanchored Inflation Expectations

Fasani, Stefano and Miescu, Mirela and Rossi, Lorenza (2026) Nonlinearities With Deanchored Inflation Expectations. International Economic Review. ISSN 0020-6598

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Abstract

Using a nonlinear VAR, we examine the asymmetric effects of shocks to long‐run inflation expectations. Negative shocks, which temporarily lower long‐run inflation expectations, have a stronger and more persistent impact on output, investment, and firm entry compared to positive shocks. We provide a novel theoretical explanation, demonstrating how these shocks influence the second‐order components of the model, shaping firms' “wait‐and‐see” behavior—particularly along both the intensive and extensive margins of the investment channel.