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The formation of European inflation expectations: One learning rule does not fit all

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  • Christina Strobach
  • Carin van der Cruijsen

Abstract

We empirically investigate how well different learning rules manage to explain the formation of household inflation expectations in six key member countries of the euro area. Our findings reveal a pronounced heterogeneity in the learning rules employed on the country level. While the expectation formation process in some countries can be best explained by rules that incorporate forward-looking elements (Germany, Italy, the Netherlands), households in other countries employ information on energy prices (France) or form their expectations by means of more traditional learning rules (Belgium, Spain). Moreover, our findings suggest that least squares based algorithms significantly outperform their stochastic gradient counterparts, not only in replicating inflation expectation data but also in forecasting actual inflation rates.

Suggested Citation

  • Christina Strobach & Carin van der Cruijsen, 2015. "The formation of European inflation expectations: One learning rule does not fit all," DNB Working Papers 472, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:472
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    References listed on IDEAS

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    Cited by:

    1. Malka de Castro Campos & Federica Teppa, 2016. "Individual inflation expectations in a declining-inflation environment: Evidence from survey data," DNB Working Papers 508, Netherlands Central Bank, Research Department.

    More about this item

    Keywords

    Inflation expectations; adaptive learning algorithms; household survey;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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