The role of forward- and backward-looking information for inflation expectations formation

Assuming that private forecasters learn inflation dynamics to form their inflation expectations and that they believe a hybrid New Keynesian Phillips curve (NKPC) to capture the true data-generating process of inflation, we aim at establishing the role of backward- and forward-looking information in the inflation expectation formation process. We find that longer term expectations are crucial in shaping shorter horizon expectations. While the influence of backward-looking information seems to diminish over time, we do not find evidence of a structural break in the expectation formation process of professional forecasters. Our results further suggest that the weight put on longer term expectations does not solely reflect a mean-reverting process to trend inflation. Rather, it might also capture beliefs about the central bank's long-run inflation target and its credibility to achieve inflation stabilization.