Inflation shocks and the New Keynesian model: When should central banks fear inflation expectations?

When inflation picks up, central banks fear that de-anchored expectations trigger ever increasing inflation, but this scenario does not materialize in the standard New Keynesian (NK) blueprint for central banks. Divergent inflation processes may result introducing boundedly rational beliefs about future inflation that de-anchor endogenously, together with indexed wages and persistent shocks. However, by means of simulations of the model, we find that the relevant parameters should be far beyond their consensus empirical values. Either the concern with the de-anchoring of inflation expectations is overrated or it should be given different theoretical underpinnings than the NK ones.