Inflation Targeting And Expectations

Anchored expectations should be such that one perceives little risk of either high or low inflation in the future. Hence, the range of possible outcomes for inflation considered realistic by agents should be quite limited if expectations are well anchored, and their confidence in their forecasts should therefore be relatively high. To quantify this notion, we assessed the degree of uncertainty in New Zealand firms’ forecasts by asking managers to assign probabilities to a range of possible inflation outcomes. Using these distributions, we computed the standard deviation of each manager’s forecast. The average standard deviation is 2%, implying that firm managers have a lot of uncertainty around their forecasts. Furthermore, there is considerable heterogeneity in the degree of uncertainty associated with individuals’ forecasts.

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