Academic journal article Baltic Journal of Economics

Survey Measures of Inflation Expectations in Poland: Are They Relevant from the Macroeconomic Perspective?

Academic journal article Baltic Journal of Economics

Survey Measures of Inflation Expectations in Poland: Are They Relevant from the Macroeconomic Perspective?

Article excerpt

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1. Introduction

The importance of expectations, including inflation expectations, is perceived as one of the pillars of the consensus on monetary policy prevailing in the central bank community in the years before the global financial crisis (Clarida, 2012). It results directly from the developments of macroeconomic theory, especially from the New Keynesian economics, that highlights the role of inflation expectations for price setting. Also in the current low inflation environment understanding the formation of inflation expectations and their impact on actual inflation seems highly important.

The aim of this paper is to assess the relevance of alternative measures of inflation expectations - including model-consistent expectations and survey-based measures of enterprises', financial sector analysts' and consumers' expectations - in a highly aggregated New Keynesian model of monetary policy transmission in Poland (MMPP). The sample period is determined by the availability of survey data - it starts in 2001 and ends in 2014. During this period monetary policy in Poland was conducted within the inflation targeting strategy.

Having different versions of the New Keynesian model estimated, we analyse their dynamic properties and assess how they differ from each other. We are particularly interested in comparing responses of the main macroeconomic variables to monetary impulses, including the interest rate impulse, exchange rate impulse and inflation target impulse. To select the best-performing measure of inflation expectations we evaluate forecasting properties of the models that use different proxies for this unobservable variable. In this way we try to respond to a more fundamental question, that is, if expectations data when used in forecasting models lead to better forecasting performance (Pesaran & Weale, 2006).

The paper has the following structure. Section 2 presents literature review. Section 3 describes data and models used in the empirical part of the study. Section 4 discusses the results. The final section concludes the study.

2. Literature review

Inflation expectations are in the centre of modern macroeconomic theory. Various specifications of the Phillips curve suggested by different schools of economic thought - that is, the expectations-augmented Phillips curve (Friedman, 1968; Phelps, 1967), the New Keynesian Phillips curve (NKPC, Goodfriend & King, 1997) or the hybrid New Keynesian Phillips curve (HNKPC, Fuhrer & Moore, 1995; Galí & Gertler, 1999; Roberts, 1997) - predict that inflation expectations have a direct impact on prices.

The New Keynesian models usually use the assumption of rational (model-consistent) or hybrid expectations, being to some extent forward-looking and to some extent backward-looking (e.g. Gerberding, 2001; Hubert & Mirza, 2014). In some studies surveybased measures of inflation expectations are used instead, although usually in singleequation models, describing price formation in isolation from the rest of macroeconomic relationships. In particular, direct measures of inflation expectations, based on consumer or professional economists' surveys, have been used in the literature to estimate different versions of the Phillips curve.1 Henzel and Wollmershäuser (2006) estimate the hybrid Phillips curve for the euro zone, France, Germany, Italy, U.K. and U.S. using direct measures of economic experts' inflation expectations. In addition they present an overview of other studies, providing estimates of the hybrid Phillips curve for the euro area, Germany and U.S., in which various survey-based measures of inflation expectations were used. In all the cases under consideration direct measures of expectations appear statistically significant. Paloviita (2008) shows that the purely forward-looking Phillips curve in European economies is clearly outperformed by the New Classical and HNKPCs estimated with Consensus Economics survey data on inflation expectations. …

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