Is inflation driven by survey-based, VAR-based or myopic expectations? An empirical assessment from US real-time data

The relative importance of survey-based, VAR-based or myopic expectations is evaluated in accounting for US inflation dynamics in a New Keynesian Phillips Curve (NKPC) setting. Our contribution is threefold. First, we estimate the NKPC with both final and real-time vintage data in order to control for large revisions in the real GDP data. Second, we distinguish between two different series for VAR-based inflation forecasts—derived by a recursive or rolling-window method—to account for changes in the conduct and transmission mechanisms of US monetary policy after World War II. Third, joint restrictions are tested in the NKPC to assess whether one of the expectational variables is able, on its own, to capture inflation dynamics. On a statistical basis, we find that there is no clear-cut winner between VAR- and survey-based inflation expectations. Most of our estimated NKPC variants conclude that survey inflation expectations tend to have the largest numerical weight. Nevertheless, the difference between VAR- and survey-based expectations’ estimated coefficients is not statistically significant. Moreover, myopic expectations do not play any significant role in the majority of the estimated NKPC variants.