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Rationality and anchoring of inflation expectations: An assessment from survey‐based and market‐based measures

Helder de Mendonça (), Pedro Mendes Garcia and José Valentim Machado Vicente

Journal of Forecasting, 2021, vol. 40, issue 6, 1027-1053

Abstract: The aim of this paper is twofold. Firstly, we test the rationality of survey‐based and market‐based inflation expectations. Secondly, we investigate whether they indicate a different performance of the central bank in anchoring inflation expectations. Briefly, this paper verifies if inflation expectations' proxies display the same features regarding rationality and anchoring. Using data from the Brazilian market, we present robust evidence that both survey‐based and market‐based inflation expectations have useful content to explain realized inflation. Moreover, we find that these proxies of inflation expectations provide different assessments of the central bank's ability to anchor inflation expectations. The findings point out that central banks must monitor both survey‐based and market‐based inflation expectations to improve their monetary policy conduct.

Date: 2021
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https://doi.org/10.1002/for.2746

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