Do Central Bank Communications Influence Survey of Professional Forecasters? An Empirical Investigation

Abstract

The present study contributes to our understanding regarding private-sector inflation expectations and how central bank communications influence them in an emerging economy like India. This study uses the Autoregressive Distributed Lag (ARDL) regression function to estimate the influence of the determinants on the survey of professional forecasters for a period ranging from Q1 2014–2015 to Q4 2021–2022. Our results demonstrate the significant positive influence of the lagged period inflation forecasted by the professionals and central bank communications in the form of inflation projections on the inflation forecasted by the professionals in the current period. Macroeconomic variables like repo rate, lagged realized inflation, GDP, merchandise exports and imports, and crude oil rates turned out to be non-significant in influencing the inflation forecasted by the professionals, at least in the short run. The literature highlights the importance of anchoring private-sector expectations by the central bank in an economy, and our results provide empirical evidence for the same, along with its implications on policy making.