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Better than Perceived? Correcting Misperceptions about Central Bank Inflation Forecasts

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  • Muhammed Bulutay

Abstract

How do households perceive the forecasting performance of the central bank? Using two novel experiments embedded in the Bundesbank's Survey on Consumer Expectations (total N=9500), this article shows that the majority of German households underestimate the ECB's inflation forecasting accuracy. In particular, they believe that the ECB is overly optimistic. Communication that challenges these perceptions improves the anchoring of inflation expectations, reduces inflation uncertainty and discourages consumption of durable goods. Treated households also report higher trust in the ECB, perceive the ECB's inflation target as more credible, the ECB's communication as more honest, and the ECB's policy as more beneficial to them. Finally, the causal effect of central bank trust on inflation expectations is quantified using instruments to deal with endogeneity.

Suggested Citation

  • Muhammed Bulutay, 2024. "Better than Perceived? Correcting Misperceptions about Central Bank Inflation Forecasts," Berlin School of Economics Discussion Papers 0034, Berlin School of Economics.
    • Handle: RePEc:bdp:dpaper:0034
    DOI: 10.48462/opus4-5355
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    More about this item

    Keywords

    Inflation Expectations; Central Bank Trust; Inflation Forecasts; Central Bank Communication; Information Provision Experiments;
    All these keywords.

    JEL classification:

    • C83 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Survey Methods; Sampling Methods
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy

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