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

Abstract : 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.
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Submitted on : Tuesday, October 26, 2021 - 11:39:16 AM
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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⟩



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