The role of forward- and backward-looking information for inflation expectations formation

Paul Hubert (1) , Harun Mirza (2)

1 OFCE - Observatoire français des conjonctures économiques (Sciences Po)
2 Centre de recherche de la Banque Centrale européenne

Assuming that private forecasters learn inflation dynamics to form their inflation expectations and that they believe a hybrid New Keynesian Phillips curve (NKPC) to capture the true data-generating process of inflation, we aim at establishing the role of backward- and forward-looking information in the inflation expectation formation process. We find that longer term expectations are crucial in shaping shorter horizon expectations. While the influence of backward-looking information seems to diminish over time, we do not find evidence of a structural break in the expectation formation process of professional forecasters. Our results further suggest that theweight put on longer term expectations does not solely reflect amean-reverting process to trend inflation. Rather, it might also capture beliefs about the central bank's long-run inflation target and its credibility to achieve inflation stabilization.

Keywords: Inflation; New keynesian phillips curve; Survey expectations

Domains: Humanities and Social Sciences; Economics and Finance

Paul Hubert, Harun Mirza. The role of forward- and backward-looking information for inflation expectations formation. Journal of Forecasting, 2019, 38 (8), pp.733 - 748. ⟨10.1002/for.2596⟩. ⟨hal-03403616⟩