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Inflation expectations and their role in Eurosystem forecasting

Author

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  • Baumann, Ursel
  • Darracq Pariès, Matthieu
  • Westermann, Thomas
  • Riggi, Marianna
  • Bobeica, Elena
  • Meyler, Aidan
  • Böninghausen, Benjamin
  • Fritzer, Friedrich
  • Trezzi, Riccardo
  • Jonckheere, Jana
  • Kulikov, Dmitry
  • Popova, Dilyana
  • Pert, Sulev
  • Michail, Nektarios
  • Paloviita, Maritta
  • Brázdik, František
  • Pönkä, Harri
  • Bess, Mikkel
  • Vilmi, Lauri
  • Jørgensen, Casper
  • Robert, Pierre-Antoine
  • Al-Haschimi, Alexander
  • Gmehling, Philipp
  • Bańbura, Marta
  • Hartmann, Matthias
  • Charalampakis, Evangelos
  • Menz, Jan-Oliver
  • Hartwig, Benny
  • Schupp, Fabian
  • Hutchinson, John
  • Speck, Christian
  • Paredes, Joan
  • Volz, Ute
  • Reiche, Lovisa
  • Bragoudakis, Zacharias
  • Tirpák, Marcel
  • Kasimati, Evangelia
  • Tengely, Veronika
  • Łyziak, Tomasz
  • Tagliabracci, Alex
  • Stanisławska, Ewa
  • Bessonovs, Andrejs
  • Iskrev, Nikolay
  • Krasnopjorovs, Olegs
  • Gavura, Miroslav
  • Reichenbachas, Tomas
  • Damjanović, Milan
  • Colavecchio, Roberta
  • Maletic, Matjaz
  • Galati, Gabriele
  • Kearney, Ide
  • Stockhammar, Pär
  • Leiva-Leon, Danilo

Abstract

This paper summarises the findings of the Eurosystem’s Expert Group on Inflation Expectations (EGIE), which was one of the 13 work streams conducting analysis that fed into the ECB’s monetary policy strategy review. The EGIE was tasked with (i) reviewing the nature and behaviour of inflation expectations, with a focus on the degree of anchoring, and (ii) exploring the role that measures of expectations can play in forecasting inflation. While it is households’ and firms’ inflation expectations that ultimately matter in the expectations channel, data limitations have meant that in practice the focus of analysis has been on surveys of professional forecasters and on market-based indicators. Regarding the anchoring of inflation expectations, this paper considers a number of metrics: the level of inflation expectations, the responsiveness of longer-term inflation expectations to shorter-term developments, and the degree of uncertainty. Different metrics can provide conflicting signals about the scale and timing of potential unanchoring, which underscores the importance of considering all of them. Overall, however, these metrics suggest that in the period since the global financial and European debt crises, longer-term inflation expectations in the euro area have become less well anchored. Regarding the role measures of inflation expectations can play in forecasting inflation, this paper finds that they are indicative for future inflationary developments. When it comes to their predictive power, both market-based and survey-based measures are found to be more accurate than statistical benchmarks, but do not systematically outperform each other. Beyond their role as standalone forecasts, inflation expectations bring forecast gains when included in forecasting models and can also inform scenario and risk analysis in projection exercises performed using structural models. ... JEL Classification: D84, E31, E37, E52

Suggested Citation

  • Baumann, Ursel & Darracq Pariès, Matthieu & Westermann, Thomas & Riggi, Marianna & Bobeica, Elena & Meyler, Aidan & Böninghausen, Benjamin & Fritzer, Friedrich & Trezzi, Riccardo & Jonckheere, Jana & , 2021. "Inflation expectations and their role in Eurosystem forecasting," Occasional Paper Series 264, European Central Bank.
  • Handle: RePEc:ecb:ecbops:2021264
    Note: 345263
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    Cited by:

    1. Ehrmann, Michael & Holton, Sarah & Kedan, Danielle & Phelan, Gillian, 2021. "Monetary policy communication: perspectives from former policy makers at the ECB," Working Paper Series 2627, European Central Bank.
    2. Andrejs Zlobins, 2022. "Into the Universe of Unconventional Monetary Policy: State-dependence, Interaction and Complementarities," Working Papers 2022/05, Latvijas Banka.
    3. Bobeica, Elena & Hartwig, Benny, 2023. "The COVID-19 shock and challenges for inflation modelling," International Journal of Forecasting, Elsevier, vol. 39(1), pages 519-539.
    4. Koester, Gerrit & Lis, Eliza & Nickel, Christiane & Osbat, Chiara & Smets, Frank, 2021. "Understanding low inflation in the euro area from 2013 to 2019: cyclical and structural drivers," Occasional Paper Series 280, European Central Bank.

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    4. Gabriele Galati & Richhild Moessner & Maarten van Rooij, 2021. "Anchoring of consumers’ long-term euro area inflation expectations during the pandemic," Working Papers 715, DNB.
    5. repec:zbw:bofrdp:2021_010 is not listed on IDEAS
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    More about this item

    Keywords

    anchoring; forecasting; Inflation expectations; macroeconomics; monetary policy;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • 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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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