I. Motivation

1. Inflation Expectation Dynamics: The Role of Past, Present and Forward-Looking Information Paul Hubert1& Harun Mirza2 1OFCE – Sciences Po, Paris; 2 European Central Bank, Frankfurt, harun.mirza@ecb.int I. Motivation III. Baseline Results IV. Discussion and Conclusion Further-ahead expectations might be seen as a representation of the long-run expected equilibrium value of inflation, or trend inflation. This is in line with argument of Faust and Wright (2012) that inflation expectations represent the way forecasters believe inflation will move from its current value towards its perceived trend or equilibrium value. Policy implications: 1. Anchoring medium- or long-term expectations enables anchoring short-term expectations. 2. Private expectations depend also on backward-looking information 3. Inflation expectations formation appears to be based on the hybrid NKPC. • Do longer-term inflation expectations play a role in determining shorter-term private inflation expectations? • We aim at establishing the role of past, present and forward-looking information in inflation expectation dynamics. • -Important because optimal monetary policy is determined by the degree of price stickiness and by the inflation expectations formation process. • We assume that NKPC is the DGP for inflation and that survey inflation expectations are unbiased. This yields an NKPC-based inflation expectations formation process. II. Data & Methodology Subsamples Model Comparison Hybrid New Keynesian Phillips Curve (NKPC): Unbiased expectations: NKPC-based inflation expectations formation process: Replace expectations by data from Survey of Professional Forecasters (SPF): US data from 1981Q3-2012Q3, median of individual responses for GDP deflator and CPI inflation, use output gap as marginal cost measure. GMM results Consumers vs. Professionals Real-time data