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The role of forward- and backward-looking information for inflation expectations formation

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  • Paul Hubert

    (Observatoire français des conjonctures économiques)

  • Harun Mirza

    (Banque centrale européenne)

Abstract

Assuming that private forecasters learn inflation dynamics to form their inflation expectations and that they believe a hybrid New Keynesian Phillips curve (NKPC) to capture the true data-generating process of inflation, we aim at establishing the role of backward- and forward-looking information in the inflation expectation formation process. We find that longer term expectations are crucial in shaping shorter horizon expectations. While the influence of backward-looking information seems to diminish over time, we do not find evidence of a structural break in the expectation formation process of professional forecasters. Our results further suggest that theweight put on longer term expectations does not solely reflect amean-reverting process to trend inflation. Rather, it might also capture beliefs about the central bank's long-run inflation target and its credibility to achieve inflation stabilization.

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  • Paul Hubert & Harun Mirza, 2019. "The role of forward- and backward-looking information for inflation expectations formation," Sciences Po publications info:hdl:2441/3v5mev848s8, Sciences Po.
    • Handle: RePEc:spo:wpmain:info:hdl:2441/3v5mev848s8148gjqcbf4mva5q
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