Inflation expectation dynamics: the role of past present and forward looking information

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 agents need to learn inflation dynamics to form their inflation expectations and that they believe a hybrid New-Keynesian Phillips Curve (NKPC) is the true data generating process of inflation, we aim at establishing the role of forward-looking information in inflation expectation dynamics. We find that longer term expectations are crucial in shaping shorter-horizon expectations. Professional forecasters put a greater weight on forward-looking information presumably capturing beliefs about the central bank inflation target or trend inflation while lagged inflation remains significant. Finally,the NKPC-based inflation expectations model fits well for professional forecasts in contrast to consumers.

Keywords: survey expectations; inflation; new keynesian; Philipps curve

Domains: Economics and Finance

Paul Hubert, Harun Mirza. Inflation expectation dynamics: the role of past present and forward looking information. 2014. ⟨hal-03473828⟩