Tomasz Łyziak’s research while affiliated with Narodowy Bank Polski and other places

By carefully matching the data sets from the Michigan Survey of Consumers with the Survey of Professional Forecasters, we show that there exists substantial heterogeneity in the propensity of U.S. households to learn from experts in forming inflation expectations. Additional results for a group of European economies broadly confirm this observation. We advance an extended version of the sticky‐information model to analyze disagreement in consumer inflation expectations. Besides differences in consumers' propensities to learn, disagreement in our model arises from heterogeneity in consumers' fundamental inflation and past expectations and experts' different views about future inflation.

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. In terms of the implications for the ECB’s economic and monetary analysis going forward, the work of the EGIE essentially highlights the need for (i) more data on households’ and firms’ inflation expectations, (ii) a comprehensive framework for assessing (un)anchoring and (iii) further considerations regarding the use of observed expectation measures in forecasting models. JEL codes: D84, E31, E37, E52. Keywords: Inflation expectations, anchoring, forecasting, macroeconomics, monetary policy.

We provide evidence that inconsistent micro-level survey responses regarding inflation expectations are common in the European Commission Consumer Survey, but they distort neither the aggregate measures of inflation expectations nor the results of the analysis of expectation formation on the macro-level.

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. In terms of the implications for the ECB’s economic and monetary analysis going forward, the work of the EGIE essentially highlights the need for (i) more data on households’ and firms’ inflation expectations, (ii) a comprehensive framework for assessing (un)anchoring and (iii) further considerations regarding the use of observed expectation measures in forecasting models.

Monetary policy affects private sector expectations through not only its actions, but also its communication. In this paper, we adopt a novel approach to compare the impact of central bank interest rate decisions, macroeconomic projections, and textual content of policy documents on private sector expectations. We demonstrate that the role of central bank communication and decisions differs depending on the variable and the forecast horizon. The reaction of inflation expectations to typical changes in policy communication is stronger than their responses to typical policy decisions, whereas the opposite holds for interest rate expectations. Our findings imply that central banks have a range of measures at their disposal to affect expectations. The ability to use communication in managing expectations is especially important when the scope of reducing interest rates is limited.

According to the fiscal theory of the price level, in a non-Ricardian regime, high public debt should lead to a price-level increase so as to fulfill intertemporal government budget constraint. Forward-looking agents should anticipate this rise by pushing up their inflation expectations. This study tests the above hypothesis by analyzing the impact of fiscal sustainability on the formation of inflation expectations by private-sector agents – consumers and professional forecasters – in European countries. In the study, we estimate models of inflation expectations, and we include public debt among the explanatory variables. The novelty of this study lies in our analysis of whether the relationship between public debt and inflation expectations is affected by the degree to which fiscal policy is sustainable in European economies. We find that fiscal stance influences the inflation expectations of consumers and professional forecasters. Contrary to intuition, the reaction of consensus economic forecasts to public debt in countries with sustainable fiscal policies seems stronger than in economies with less disciplined fiscal policies. This may suggest that fiscal authorities are constrained by the way in which private-sector agents form their expectations, conducting more responsible fiscal policy in countries where the reaction of economic agents to fiscal variables is stronger.

In this paper we develop a new test for fiscal sustainability and propose a synthetic fiscal sustainability indicator. Conventional tests based on fiscal reaction functions assume a constant real interest rate. However, many empirical studies find evidence on a positive response of long-term rates to sovereign debt levels. We take this evidence into account and endogenize the long-term real interest rate in testing fiscal sustainability. We apply the new test for the European economies. We find that considering the response of interest rate to debt may change the assessment of fiscal sustainability. More specifically, our results indicate that fiscal sustainability is at risk in a number of European Union economies, even if the results of traditional approaches suggest sustainable fiscal policy.