Do Inflation Expectations Improve Model‐Based Inflation Forecasts?

Abstract Those of professional forecasters do. For a wide range of time‐series models for the euro area and its member states, we find a higher average forecast accuracy of models that incorporate information on inflation expectations from the ECB's Survey of Professional Forecasters (SPF) and Consensus Economics compared to their counterparts that do not. The professional forecasters expectations seem to help to correct the upward forecast bias in the low inflation period and to make the model forecasts more robust. By contrast, incorporating expectations derived from financial market prices or those of firms and households does not lead to systematic improvements in forecast performance.