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A theory-based method to evaluate the impact of central bank inflation forecasts on private inflation expectations

Author

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  • Vereda, Luciano
  • Savignon, João
  • Gouveia da Silva, Tarciso

Abstract

We propose a theory-based method to assess the impact of central banks’ inflation forecasts on private inflation expectations. We use regressions derived from a leader-follower model with noisy information and public signals. The leader is the Central Bank (CB), which solves a signal extraction problem to estimate the rational expectation of inflation. Private agents then act by solving an analogous problem to estimate this same value by using their own information and the forecasts disclosed by the CB. The method allows for estimating the structural parameters that characterize noisy information models, which are hard to estimate using purely econometric tools. It also sheds light on the issue of the alleged CB’s superiority in predicting inflation behavior.

Suggested Citation

  • Vereda, Luciano & Savignon, João & Gouveia da Silva, Tarciso, 2024. "A theory-based method to evaluate the impact of central bank inflation forecasts on private inflation expectations," International Journal of Forecasting, Elsevier, vol. 40(3), pages 1069-1084.
    • Handle: RePEc:eee:intfor:v:40:y:2024:i:3:p:1069-1084
    DOI: 10.1016/j.ijforecast.2023.09.005
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