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

Listed author(s):
  • Tomasz Łyziak

    (Narodowy Bank Polski)

  • Maritta Paloviita

    (Bank of Finland)

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.

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Paper provided by Narodowy Bank Polski, Economic Research Department in its series NBP Working Papers with number 261.

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Length: 26
Date of creation: 2017
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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  1. Paul Hubert, 2015. "Do Central Bank Forecasts Influence Private Agents? Forecasting Performance versus Signals," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(4), pages 771-789, 06.
  2. Paul Hubert, 2015. "ECB Projections as a Tool for Understanding Policy Decisions," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 34(7), pages 574-587, November.
  3. David H. Romer & Christina D. Romer, 2000. "Federal Reserve Information and the Behavior of Interest Rates," American Economic Review, American Economic Association, vol. 90(3), pages 429-457, June.
  4. Joshua Abel & Robert Rich & Joseph Song & Joseph Tracy, 2016. "The Measurement and Behavior of Uncertainty: Evidence from the ECB Survey of Professional Forecasters," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(3), pages 533-550, 04.
  5. Paul Hubert, 2013. "ECB projections as a tool for understanding policy decisions," Documents de Travail de l'OFCE 2013-04, Observatoire Francais des Conjonctures Economiques (OFCE).
  6. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1295-1328.
  7. Masazumi Hattori & Steven Kong & Frank Packer & Toshitaka Sekine, 2016. "The effects of a central bank's inflation forecasts on private sector forecasts: Recent evidence from Japan," BIS Working Papers 585, Bank for International Settlements.
  8. Paul Hubert, 2015. "The Influence and Policy Signalling Role of FOMC Forecasts," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 77(5), pages 655-680, October.
  9. Friedrich Heinemann & Katrin Ullrich, 2006. "The Impact of EMU on Inflation Expectations," Open Economies Review, Springer, vol. 17(2), pages 175-195, April.
  10. Stefan Gerlach, 2007. "Interest Rate Setting by the ECB, 1999-2006: Words and Deeds," International Journal of Central Banking, International Journal of Central Banking, vol. 3(3), pages 1-46, September.
  11. Geoff Kenny & Thomas Kostka & Federico Masera, 2014. "How Informative are the Subjective Density Forecasts of Macroeconomists?," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 33(3), pages 163-185, 04.
  12. Łyziak, Tomasz & Paloviita, Maritta, 2017. "Anchoring of inflation expectations in the euro area: Recent evidence based on survey data," European Journal of Political Economy, Elsevier, vol. 46(C), pages 52-73.
  13. Tomasz Łyziak, 2013. "Formation of Inflation Expectations by Different Economic Agents," Eastern European Economics, Taylor & Francis Journals, vol. 51(6), pages 5-33, November.
  14. Kabundi, Alain & Schaling, Eric & Some, Modeste, 2015. "Monetary policy and heterogeneous inflation expectations in South Africa," Economic Modelling, Elsevier, vol. 45(C), pages 109-117.
  15. Ricardo Nunes, 2010. "Inflation Dynamics: The Role of Expectations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(6), pages 1161-1172, 09.
  16. Pedersen, Michael, 2015. "What affects the predictions of private forecasters? The role of central bank forecasts in Chile," International Journal of Forecasting, Elsevier, vol. 31(4), pages 1043-1055.
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