ABSTRACT
This chapter aims to analyse the role of consumer inflation expectations as a force driving inflation. Instead of assuming that inflation expectations are rational – which is a feature of the New Keynesian Phillips Curve (NKPC) – we refer to direct measures of consumer expectations quantified on the basis of qualitative surveys and use them in estimating the hybrid-type Phillips curve. Our attempts to perform such analysis for all CEE4 countries were not fully successful due to a constrained reliability of quantified measures of expectations in the case of Hungary and Slovakia. Hence, empirical tests verifying the degree of consumer inflation expectations’ unbiasedness and their influence on price dynamics are done only for the Czech Republic and Poland. The chapter is organized in the following way. The first section introduces the workhorse setup dominating inflation dynamics modelling in the last decade, the New Keynesian Phillips Curve. The second section outlines quantification methods used to quantify consumer inflation expectations on the basis of European Commission Consumer Surveys and evaluates their results for the Czech Republic, Hungary, Poland and Slovakia. The third section tests the role of inflation expectations of Czech and Polish consumers in affecting price dynamics and discusses the degree, to which the unbiasedness requirement of the rational expectations hypothesis is met. The last section concludes.
