Uncertainty in the Formation of Inflation Expectations in Japan: An Analysis Using the Macroeconomic Model Q-JEM

Ichiro Fukunaga, Yui Kishaba, Nao Shibata and Shunichi Yoneyama
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Yui Kishaba: Bank of Japan
Nao Shibata: Bank of Japan
Shunichi Yoneyama: Bank of Japan

No 25-E-3, Bank of Japan Working Paper Series from Bank of Japan

Abstract: This paper examines the formation mechanism of medium- to long-term inflation expectations in Japan using the Bank of Japan's large-scale macroeconomic model, the Quarterly Japanese Economic Model (Q-JEM), from the perspective of the model's past forecast accuracy and its assessment of future uncertainty. We compare the forecast accuracy of various specifications of the inflation expectations function in the model, and find that specifications that take into account the mechanism of adaptive expectations, which is influenced by past actual values of inflation, provided relatively high forecast accuracy on average since 2013. However, the relative forecast accuracy between different specifications varied from phase to phase, suggesting a large uncertainty in the expectations formation mechanism itself. We also assess the future uncertainty of inflation expectations based on the model's past forecast errors. Under the assumption of adaptive expectations mechanism, inflation expectations are more likely to rise when the recent actual inflation is higher.

Keywords: inflation expectations; monetary policy; large-scale macroeconomic model (search for similar items in EconPapers)
JEL-codes: C53 E31 E37 E52 (search for similar items in EconPapers)
Date: 2025-02-19
New Economics Papers: this item is included in nep-cba and nep-mon
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