Are Survey Expectations Theory-Consistent? The Role of Central Bank Communication and News

Abstract

In this paper we analyze whether central bank communication can facilitate the understanding of key economic concepts. Using survey data for consumers and professionals, we calculate how many of them have expectations consistent with the Fisher Equation, the Taylor rule and the Phillips curve and test, by accounting for three different communication channels, whether central banks can influence those. A substantial share of participants has expectations consistent with the Fisher equation, followed by the Taylor rule and the Phillips curve. We show that having theory-consistent expectations is beneficial, as it improves the forecast accuracy. Furthermore, consistency is time varying. Exploring this time variation, we provide evidence that central bank communication as well as news on monetary policy can facilitate the understanding of those concepts and thereby improve the efficacy of monetary policy.

'Deja Vol' Revisited: Survey Forecasts of Macroeconomic Variables Predict Volatility in the Cross-Section of Industry Portfolios

“…The present value model introduced in Section 3 implies that a high dividend-price ratio today forecasts higher excess returns in the future. 27 This is consistent with our finding of a negative effect of the dividend-price ratio on future stock volatility. In contrast, a high price-earnings ratio predicts increasing stock volatility.…”

“…The relation between stock volatility and inflation is also likely to depend on the market participants' beliefs about the central bank's reaction function. If the central bank follows an inflation objective, then higher inflation expectations should be accompanied by the expectation of higher policy rates in the future (see Engel and West, 2006, Conrad and Lamla, 2010, and Dräger et al, 2016, for theoretical and empirical evidence). In response, the stock market might decline and higher inflation expectations can be associated with higher volatility.…”

On the external validity of experimental inflation forecasts: A comparison with five categories of field expectations

“…Using the Michigan survey data on inflation expectations, Lanne et al (2009) showed that households use past releases of actual inflation (rather than forward-looking forecasts) to form their inflation expectations. Dräger et al (2016) focused on consumers and professional forecasters and analysed the extent to which their expectations are in line with the Fisher equation, the Phillips curve, and the Taylor rule. Fendel et al (2010) showed that professional forecasters use the expectations-augmented Phillips curve model when they forecast macroeconomic variables.…”

“…We study how lagged inflation and output gaps affect inflation forecasts to evaluate whether the usual determinants of inflation are used by the different considered categories of agents. The formation processes of expectations and the variables entering this process have been notably studied by Mankiw and Reis (2002), Sims (2003), Lanne, Luoma and Luoto (2009), Pfajfar and Santoro (2010), Fendel, Lis and Rülke (2011), and Dräger, Lamla and Pfajfar (2016). We follow their methodology.…”

Imperfect Information and Consumer Inflation Expectations: Evidence from Microdata

“… For a discussion on the selection of the sample using the Michigan Survey of Consumers (MSC) see Carvalho and Nechio () and Dräger, et al . (). We check for robustness of our results with respect to the sample period and present estimations for our main results with the full sample period in section ‘Robustness checks’. …”