The Formation of European Inflation Expectations: One Learning Rule Does Not Fit All

41 Pages Posted: 5 May 2015 Last revised: 3 Aug 2015

Date Written: April 30, 2015

Abstract

We empirically investigate how well different learning rules manage to explain the formation of household inflation expectations in six key member countries of the euro area. Our findings reveal a pronounced heterogeneity in the learning rules employed on the country level. While the expectation formation process in some countries can be best explained by rules that incorporate forward-looking elements (Germany, Italy, the Netherlands), households in other countries employ information on energy prices (France) or form their expectations by means of more traditional learning rules (Belgium, Spain). Moreover, our findings suggest that least squares based algorithms significantly outperform their stochastic gradient counterparts, not only in replicating inflation expectation data but also in forecasting actual inflation rates.

Keywords: Inflation expectations, adaptive learning algorithms, household survey

JEL Classification: E31, E37, D84, C53

Suggested Citation

Strobach, Christina and van der Cruijsen, Carin, The Formation of European Inflation Expectations: One Learning Rule Does Not Fit All (April 30, 2015). De Nederlandsche Bank Working Paper No. 472. Available at SSRN: https://ssrn.com/abstract=2602259 or http://dx.doi.org/10.2139/ssrn.2602259

Christina Strobach (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Carin van der Cruijsen

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

HOME PAGE: http://www.dnb.nl/en/onderzoek-2/onderzoekers/overzicht-persoonlijke-paginas/index.jsp

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