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Formation of inflation expectations in turbulent times. Recent evidence from the European Survey of Professional Forecasters

Author

Listed:
  • Tomasz Łyziak

    (Narodowy Bank Polski)

  • Maritta Paloviita

    (Bank of Finland)

Abstract

This paper analyses formation of inflation expectations in the euro area. At the beginning we analyse forecast accuracy of ECB inflation projections relative to private sector forecasts. Then, using the ECB Survey of Professional Forecasters, we estimate a general model integrating two theoretical concepts, i.e. the hybrid model of expectations, including rational and static expectations, and the sticky-information (epidemiological) model. Among determinants of inflation expectations we consider – except backward-looking factors – rational expectations assumption and the effects of the ECB inflation projections. We examine whether ECB inflation projections are still important in expectations’ formation once the impact of forwardlookingness of economic agents has been taken into account. We also assess the consistency of implicit (perceived) inflation targets with the ECB inflation target. Our analysis indicates that recent turbulent times have contributed to changes in expectations’ formation in the euro area, as the importance of backward-looking mechanisms has decreased and the importance of the perceived inflation target has increased. We also find that the perceived inflation target has remained broadly consistent with the official ECB inflation target in the medium-term. However, the downward trend of the perceived target signals some risks of de-anchoring of inflation expectations. The importance of ECB inflation projections for mediumterm private sector inflation expectations has increased over time, but the magnitude of this effect is rather small. However, SPF inflation forecasts remain consistent with the ECB communication, being ether close to ECB projections or between ECB projections and the inflation target.

Suggested Citation

  • Tomasz Łyziak & Maritta Paloviita, 2017. "Formation of inflation expectations in turbulent times. Recent evidence from the European Survey of Professional Forecasters," NBP Working Papers 261, Narodowy Bank Polski.
  • Handle: RePEc:nbp:nbpmis:261
    Note: We would like to thank participants of the session on “Inflation expectations in the low inflation environment” during the 10th International Conference on Computational and Financial Econometrics in Seville (9 December 2016) for their useful comments. We are also grateful for constructive comments received in XXXIX Annual Meeting of the Finnish Economic Association in Jyväskylä (February 2017).
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    References listed on IDEAS

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    Cited by:

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    3. Łyziak, Tomasz & Paloviita, Maritta, 2017. "Formation of inflation expectations in turbulent times : Can ECB manage inflation expectations of professional forecasters?," Research Discussion Papers 13/2017, Bank of Finland.
    4. Simón Sosvilla-Rivero & María del Carmen Ramos-Herrera, 2018. "Inflation, real economic growth and unemployment expectations: an empirical analysis based on the ECB survey of professional forecasters," Applied Economics, Taylor & Francis Journals, vol. 50(42), pages 4540-4555, September.

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    More about this item

    Keywords

    Formation of inflation expectations; survey data; euro area; financial crisis; low inflation;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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