Title: Formation of inflation expectations in turbulent times: On ECB expectations' management of professional forecasters
Authors: Tomasz Lyziak - National Bank of Poland (Poland) [presenting]
Maritta Paloviita - Bank of Finland (Finland)
Abstract: The aim is to study formation of inflation expectations in the euro area. We first analyse forecast accuracy of ECB inflation projections relative to private sector forecasts. Then, using the ECB Survey of Professional Forecasters (ECB SPF), we estimate a model integrating two theoretical concepts: the hybrid model of expectations, including rational and static expectations, and sticky-information model. We examine whether ECB inflation projections are still important in expectations formation once the impact of forward-lookingness of economic agents has been taken into account. We also derive implicit inflation targets and assess their consistency with the official ECB inflation target. Our analysis indicates that recent turbulent times have contributed to changes in expectations formation, as the importance of backward-looking mechanisms has decreased, while 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 target in the medium-term. However, its downward trend suggests some risks of de-anchoring of inflation expectations. The importance of ECB inflation projections for medium-term SPF forecasts has increased over time, but the magnitude of this effect is rather small. However, SPF inflation forecasts remain consistent with the ECB communication, being either close to ECB projections or between ECB projections and the inflation target.