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

Tomasz Łyziak and Maritta Paloviita ()

No 261, NBP Working Papers from Narodowy Bank Polski, Economic Research Department

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.

Keywords: Formation of inflation expectations; survey data; euro area; financial crisis; low inflation (search for similar items in EconPapers)
JEL-codes: D84 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
Date: 2017
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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