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Rationality and anchoring of inflation expectations: An assessment from survey‐based and market‐based measures

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  • Helder Ferreira de Mendonça
  • Pedro Mendes Garcia
  • José Valentim Machado Vicente

Abstract

The aim of this paper is twofold. Firstly, we test the rationality of survey‐based and market‐based inflation expectations. Secondly, we investigate whether they indicate a different performance of the central bank in anchoring inflation expectations. Briefly, this paper verifies if inflation expectations' proxies display the same features regarding rationality and anchoring. Using data from the Brazilian market, we present robust evidence that both survey‐based and market‐based inflation expectations have useful content to explain realized inflation. Moreover, we find that these proxies of inflation expectations provide different assessments of the central bank's ability to anchor inflation expectations. The findings point out that central banks must monitor both survey‐based and market‐based inflation expectations to improve their monetary policy conduct.

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  • Helder Ferreira de Mendonça & Pedro Mendes Garcia & José Valentim Machado Vicente, 2021. "Rationality and anchoring of inflation expectations: An assessment from survey‐based and market‐based measures," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 40(6), pages 1027-1053, September.
    • Handle: RePEc:wly:jforec:v:40:y:2021:i:6:p:1027-1053
    DOI: 10.1002/for.2746
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    2. de Mendonça, Helder Ferreira & Vereda, Luciano & Araujo, Mateus de Azevedo, 2022. "What type of information calls the attention of forecasters? Evidence from survey data in an emerging market," Journal of International Money and Finance, Elsevier, vol. 129(C).
    3. de Mendonça, Helder Ferreira & Díaz, Raime Rolando Rodríguez, 2023. "Can ignorance about the interest rate and macroeconomic surprises affect the stock market return? Evidence from a large emerging economy," The North American Journal of Economics and Finance, Elsevier, vol. 64(C).

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