Consumer Beliefs about Central Bank Inflation Forecasts

Abstract

Why do consumers' inflation expectations diverge so much from central banks' forecasts? Using new surveys, we provide evidence that German consumers perceive the ECB's inflation forecasts as less accurate and more optimistic than they are. Moreover, beliefs about accuracy and bias are not highly correlated and seem to capture two different components of trust in the central bank. Using information experiments, we show that such beliefs are causally related to inflation expectations, inflation uncertainty, and trust in the ECB. We measure trust directly with a standard question and indirectly with a new six-item questionnaire that distinguishes between trust in the ECB's intentions, ability, and legitimacy. The intervention has broad effects on the ability and intention components.

Keywords: Central Bank Trust, Central Bank Communication, Survey Experiments, Inflation expectations

JEL Classification: C83, D91, E71