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The role of forward- and backward-looking information for inflation expectations formation

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  • Paul Hubert

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

  • Harun Mirza

    (Centre de recherche de la Banque Centrale européenne - Banque Centrale Européenne)

Abstract

Assuming that private forecasters learn inflation dynamics to form their inflation expectations and that they believe a hybrid New Keynesian Phillips curve (NKPC) to capture the true data-generating process of inflation, we aim at establishing the role of backward- and forward-looking information in the inflation expectation formation process. We find that longer term expectations are crucial in shaping shorter horizon expectations. While the influence of backward-looking information seems to diminish over time, we do not find evidence of a structural break in the expectation formation process of professional forecasters. Our results further suggest that theweight put on longer term expectations does not solely reflect amean-reverting process to trend inflation. Rather, it might also capture beliefs about the central bank's long-run inflation target and its credibility to achieve inflation stabilization.

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  • Paul Hubert & Harun Mirza, 2019. "The role of forward- and backward-looking information for inflation expectations formation," SciencePo Working papers Main hal-03403616, HAL.
    • Handle: RePEc:hal:spmain:hal-03403616
    DOI: 10.1002/for.2596
    Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-03403616
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