Do Inflation Expectations Improve Model-Based Inflation Forecasts?

70 Pages Posted: 4 Feb 2022

See all articles by Marta Banbura

Marta Banbura

European Central Bank

Danilo Leiva-Leon

Banco de España

Jan-Oliver Menz

Deutsche Bundesbank

Multiple version iconThere are 3 versions of this paper

Date Written: 2021


Those of professional forecasters do. For a wide range of time series models for the euro area and its member states we find a higher average forecast accuracy of models that incorporate information on inflation expectations from the ECB's SPF and Consensus Economics compared to their counterparts that do not. The gains in forecast accuracy from incorporating inflation expectations are typically not large but significant in some periods. Both short- and long-term expectations provide useful information. By contrast, incorporating expectations derived from financial market prices or those of firms and households does not lead to systematic improvements in forecast performance. Individual models we consider are typically better than univariate benchmarks but for the euro area the professional forecasters are more accurate, especially in recent years (not always for the countries). The analysis is undertaken for headline inflation and inflation excluding energy and food and both point and density forecast are evaluated using real-time data vintages over 2001-2019.

Keywords: Forecasting, Inflation, Inflation expectations, Phillips curve, BayesianVAR

JEL Classification: C53, E31, E37

Suggested Citation

Banbura, Marta and Leiva-Leon, Danilo and Menz, Jan-Oliver, Do Inflation Expectations Improve Model-Based Inflation Forecasts? (2021). Deutsche Bundesbank Discussion Paper No. 48/2021, Available at SSRN: or

Marta Banbura (Contact Author)

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

Danilo Leiva-Leon

Banco de España ( email )

Alcala 50
Madrid 28014

Jan-Oliver Menz

Deutsche Bundesbank ( email )

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

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