Title: Drivers of experts' inflation expectations in the euro area
Authors: Tomasz Lyziak - Polish Academy of Science (Poland) [presenting]
Maritta Paloviita - Bank of Finland (Finland)
Abstract: This paper analyses formation of inflation forecasts set by professional forecasters in the euro area. We use a general model which integrates two theoretical models, i.e. the hybrid model of expectations, including rational and static expectations, and the epidemiological model. We examine whether ECB inflation projections are still important in the formation of private sector forecasts once the impact of forward-lookingness of economic agents has been taken into account. On the top of that the model allows calculation of implicit (perceived) inflation targets. To explain our findings we study forecast accuracy of ECB inflation projections relative to private sector forecasts. Our analysis indicates that the formation of inflation expectations by professional forecasters in the euro area has changed recently. The importance of backward-looking mechanisms has decreased, while the importance of the perceived target has increased. The perceived inflation target remains broadly consistent with the official ECB inflation target in the medium-term; however its downward trend signals some risks of de-anchoring inflation expectations. The ECB inflation projections affect private sector inflation expectations, but the magnitude of this effect is rather small and only to small extent can be explained by better forecast performance of the ECB.