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Biases in Survey Inflation Expectations: Evidence from the Euro Area

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  • Jiaqian Chen
  • Lucyna Gornicka
  • Vaclav Zdarek

Abstract

This paper reveals new facts about inflation expectations in the euro area. By employing local projection and least squares techniques, the following five facts are documented. First, individual inflation expectations overreact to individual news. Second, the cross-section average of individual inflation expectations underreacts to shocks initially, but overreacts in the medium term. Third, disagreement about future inflation increases in response to news when the current inflation is high, and declines when inflation is low, consistent with a zero lower bound of expectations. Fourth, overreaction of individual inflation expectations to news increased after the global financial crisis (GFC). Fifth, the reaction of average expectations (and of actual inflation) to shocks became more muted post-GFC in the euro area, but not in the US economy.

Suggested Citation

  • Jiaqian Chen & Lucyna Gornicka & Vaclav Zdarek, 2022. "Biases in Survey Inflation Expectations: Evidence from the Euro Area," European Economy - Discussion Papers 170, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    • Handle: RePEc:euf:dispap:170
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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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