Long-Run Inflation Expectations
Gepubliceerd: 07 maart 2025
Professional forecasters’ long-run inflation expectations overreact to news and exhibit persistent, predictable biases in forecast errors. A model incorporating overconfidence in private information and a persistent expectations bias—which generates persistent forecast errors across most forecasters—accounts for these two features of the data, offering a valuable tool for studying long-run inflation expectations. Our analysis highlights substantial, time- varying heterogeneity in forecasters’ responses to public information, with sensitivity declining across all forecasters when monetary policy is constrained by the effective lower bound. The model provides a framework to evaluate whether policymakers’ communicated inflation paths are consistent with anchored long-run expectations.
Keywords: Panel survey data; long-run inflation expectations; rationality; expectation bias; overconfidence; overreaction; central bank communications; anchoring
JEL codes E31; D83; E52; E37
Working paper no. 829
829 - Long-Run Inflation Expectations
Research highlights:
- Using the U.S. Survey of Professional Forecasters, we develop a flexible framework for analysing how forecasters form expectations about long-run inflation.
- A model featuring overconfidence in private information and persistent expectations bias that engenders highly persistent forecast errors explains the key time-series and cross-sectional features of the data.
- Our analysis highlights substantial, time-varying heterogeneity in forecasters’ responses to public information, with sensitivity declining across all forecasters when monetary policy is constrained by the effective lower bound.
- We use the Summary of Economic Projections by the FOMC in December 2022 to illustrate how the model provides a framework to evaluate whether policymakers’ communicated inflation paths are consistent with anchored long-run expectations.
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