Inflation Expectations and Their Role in Eurosystem Forecasting

146 Pages Posted: 23 Sep 2021 Last revised: 18 Nov 2021

See all articles by Ursel Baumann

Ursel Baumann

European Central Bank (ECB)

Matthieu Darracq Paries

European Central Bank (ECB)

Thomas Westermann

European Central Bank (ECB)

Marianna Riggi

Bank of Italy

Elena Bobeica

European Central Bank (ECB)

Aidan Meyler

European Central Bank (ECB); Economist; Post graduate student

Benjamin Böninghausen

European Central Bank (ECB)

Friedrich Fritzer

Oesterreichische Nationalbank (OeNB)

Riccardo Trezzi

Board of Governors of the Federal Reserve System

Jana Jonckheere

National Bank of Belgium

Dmitry Kulikov

Bank of Estonia

Dilyana Popova

Bulgarian National Bank

Sulev Pert

Bank of Estonia

Maritta Paloviita

Bank of Finland - Research

František Brázdik

Czech National Bank; Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Harri Pönkä

Bank of Finland

Mikkel Bess

National Bank of Denmark

Pierre-Antoine Robert

Banque de France

Alexander Al-Haschimi

European Central Bank (ECB)

Philipp Gmehling

Deutsche Bundesbank

Marta Banbura

European Central Bank

Evangelos Charalampakis

European Central Bank (ECB)

Jan-Oliver Menz

Deutsche Bundesbank

Benny Hartwig

Goethe University Frankfurt; European Central Bank

Joan Paredes

European Central Bank

Ute Volz

Deutsche Bundesbank

Lovisa Reiche

European Central Bank (ECB)

Zacharias Bragoudakis

Bank of Greece; National and Kapodistrian University of Athens, Department of Economics

Marcel Tirpak

European Central Bank (ECB)

Evangelia Kasimati

Bank of Greece

Tomasz Łyziak

National Bank of Poland

Alex Tagliabracci

Bank of Italy

Ewa Stanisławska

National Bank of Poland

Andrejs Bessonovs

Latvijas Banka

Nikolay I. Iskrev

Bank of Portugal - Economic Research Department; UECE - Research Unit on Complexity in Economics

Olegs Krasnopjorovs

Latvijas Banka

Miroslav Gavura

Národná banka Slovenska

Tomas Reichenbachas

Bank of Lithuania

Milan Damjanović

Bank of Slovenia

Roberta Colavecchio

Banque centrale du Luxembourg

Matjaz Maletic

Tilburg University

Gabriele Galati

De Nederlandsche Bank

Danilo Leiva

Banco de España

Ide Kearney

De Nederlandsche Bank

Pär Stockhammar

Sveriges Riksbank

Date Written: September, 2021

Abstract

This paper summarises the findings of the Eurosystem’s Expert Group on Inflation Expectations (EGIE), which was one of the 13 work streams conducting analysis that fed into the ECB’s monetary policy strategy review. The EGIE was tasked with (i) reviewing the nature and behaviour of inflation expectations, with a focus on the degree of anchoring, and (ii) exploring the role that measures of expectations can play in forecasting inflation. While it is households’ and firms’ inflation expectations that ultimately matter in the expectations channel, data limitations have meant that in practice the focus of analysis has been on surveys of professional forecasters and on market-based indicators. Regarding the anchoring of inflation expectations, this paper considers a number of metrics: the level of inflation expectations, the responsiveness of longer-term inflation expectations to shorter-term developments, and the degree of uncertainty. Different metrics can provide conflicting signals about the scale and timing of potential unanchoring, which underscores the importance of considering all of them. Overall, however, these metrics suggest that in the period since the global financial and European debt crises, longer-term inflation expectations in the euro area have become less well anchored. Regarding the role measures of inflation expectations can play in forecasting inflation, this paper finds that they are indicative for future inflationary developments. When it comes to their predictive power, both market-based and survey-based measures are found to be more accurate than statistical benchmarks, but do not systematically outperform each other. Beyond their role as standalone forecasts, inflation expectations bring forecast gains when included in forecasting models and can also inform scenario and risk analysis in projection exercises performed using structural models. ...

Keywords: anchoring, forecasting, Inflation expectations, macroeconomics, monetary policy

JEL Classification: D84, E31, E37, E52

Suggested Citation

Baumann, Ursel and Darracq Paries, Matthieu and Westermann, Thomas and Riggi, Marianna and Bobeica, Elena and Meyler, Aidan and Böninghausen, Benjamin and Fritzer, Friedrich and Trezzi, Riccardo and Jonckheere, Jana and Kulikov, Dmitry and Popova, Dilyana and Pert, Sulev and Paloviita, Maritta and Brázdik, František and Pönkä, Harri and Bess, Mikkel and Robert, Pierre-Antoine and Al-Haschimi, Alexander and Gmehling, Philipp and Banbura, Marta and Charalampakis, Evangelos and Menz, Jan-Oliver and Hartwig, Benny and Paredes, Joan and Volz, Ute and Reiche, Lovisa and Bragoudakis, Zacharias and Tirpak, Marcel and Kasimati, Evangelia and Łyziak, Tomasz and Tagliabracci, Alex and Stanisławska, Ewa and Bessonovs, Andrejs and Iskrev, Nikolay I. and Krasnopjorovs, Olegs and Gavura, Miroslav and Reichenbachas, Tomas and Damjanović, Milan and Colavecchio, Roberta and Maletic, Matjaz and Galati, Gabriele and Leiva, Danilo and Kearney, Ide and Stockhammar, Pär, Inflation Expectations and Their Role in Eurosystem Forecasting (September, 2021). ECB Occasional Paper No. 2021/264, Available at SSRN: https://ssrn.com/abstract=3928285 or http://dx.doi.org/10.2139/ssrn.3928285

Ursel Baumann (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 20
Frankfurt am Main, D-60311
Germany

Matthieu Darracq Paries

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
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+496913447604 (Fax)

Thomas Westermann

European Central Bank (ECB) ( email )

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Frankfurt am Main, 60314
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Marianna Riggi

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Elena Bobeica

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Aidan Meyler

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Economist

P.O. 559 Dame Street
Dublin 2, D2
Ireland

Post graduate student

Belfield
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Benjamin Böninghausen

European Central Bank (ECB)

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Germany

Friedrich Fritzer

Oesterreichische Nationalbank (OeNB) ( email )

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1010 Vienna, A-1011
Austria

Riccardo Trezzi

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
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Jana Jonckheere

National Bank of Belgium ( email )

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Belgium

Dmitry Kulikov

Bank of Estonia ( email )

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Estonia

Dilyana Popova

Bulgarian National Bank ( email )

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Sulev Pert

Bank of Estonia

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Maritta Paloviita

Bank of Finland - Research ( email )

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Finland
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František Brázdik

Czech National Bank ( email )

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Czech Republic

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

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Prague 1, 111 21
Czech Republic

HOME PAGE: http://www.cerge-ei.cz

Harri Pönkä

Bank of Finland ( email )

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Finland

Mikkel Bess

National Bank of Denmark

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DK-1093 Copenhagen K
Denmark

Pierre-Antoine Robert

Banque de France

Paris
France

Alexander Al-Haschimi

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Philipp Gmehling

Deutsche Bundesbank

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Frankfurt/Main, 60431
Germany

Marta Banbura

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Evangelos Charalampakis

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Jan-Oliver Menz

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Benny Hartwig

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Joan Paredes

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Ute Volz

Deutsche Bundesbank

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Lovisa Reiche

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Zacharias Bragoudakis

Bank of Greece ( email )

21 E. Venizelos Avenue
GR 102 50 Athens
Greece
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National and Kapodistrian University of Athens, Department of Economics ( email )

Sofocleous 1
Athens, 105 59
Greece
+30 21 0368 9400 (Phone)

HOME PAGE: http://www.econ.uoa.gr/

Marcel Tirpak

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Evangelia Kasimati

Bank of Greece

21 E. Venizelos Avenue
GR 102 50 Athens
Greece

Tomasz Łyziak

National Bank of Poland ( email )

Poland

Alex Tagliabracci

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Ewa Stanisławska

National Bank of Poland

00-919 Warsaw
Poland

Andrejs Bessonovs

Latvijas Banka

Riga
Latvia

Nikolay I. Iskrev

Bank of Portugal - Economic Research Department ( email )

R. do Ouro, 27
Lisboa, 1100-150
Portugal

UECE - Research Unit on Complexity in Economics ( email )

ISEG/UTL, Rua Miguel Lupi 20
Lisboa, 1249-078
Portugal
+351213925912 (Phone)
+351213971196 (Fax)

HOME PAGE: http://www.iseg.utl.pt/~uece/

Olegs Krasnopjorovs

Latvijas Banka ( email )

Riga
Latvia

Miroslav Gavura

Národná banka Slovenska ( email )

Bratislava
Slovakia

Tomas Reichenbachas

Bank of Lithuania ( email )

Totoriu 4
Vilnius, LT-01121
Lithuania

Milan Damjanović

Bank of Slovenia

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Slovenija, 1505
Slovenia

Roberta Colavecchio

Banque centrale du Luxembourg ( email )

2, boulevard Royal
Luxembourg, L-2983
Luxembourg

Matjaz Maletic

Tilburg University ( email )

Tilburg
Netherlands

Gabriele Galati

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Danilo Leiva

Banco de España

Alcala 50
Madrid 28014
Spain

Ide Kearney

De Nederlandsche Bank

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Pär Stockhammar

Sveriges Riksbank

Brunkebergstorg 11
SE-103 37 Stockholm
Sweden

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