Inflation expectations are at the centre of modern macroeconomic theory and monetary policy. They are used by central banks to gain an insight into the private sector’s assessment of the outlook for future inflation and to evaluate perceptions about the credibility of monetary policy.
For these reasons, the purpose of this paper is to examine the predictive ability and the consistency properties of countries' currency expectations in relation to the US dollar and inflation expectations considering different time horizons. To achieve this objective we use data from the World Economic Survey (WES) which is a survey conducted by the Center for Economic Studies- Ifo Institute (CESifo) Group. It is based on the forecasts of more than 1,000 economic experts who work for research institutes, universities, national ministries, central banks, international organisations, embassies, financial institutions, industry or trade associations, etc. They focus on quarterly qualitative information related to assessment of different macroeconomic indicators at present and for future forecasts among several countries. Our sample will be used to analyze predictive goodness and its consistency for exchange rates and inflation expectations for economic and monetary union (EMU) countries from 1989 until the present. To shed further light on the expectation formation process, we also consider the role of some variables as driving factors behind the inflation forecasts (considering both headline and core inflation rates) declared by the WES panel.
Key words: Inflation, exchange rate, expectations, Eurozone.
JEL Codes: F31, E31, D84.