Shaping Inflation Expectations in the Czech Economy: a Case of Financial Analysts and Corporate Managers

Martin Mandel, Jan Vejmělek
Statistika, 105(1): 18–32
https://doi.org/10.54694/stat.2024.50

Abstract
Inflation expectations play an important role in the transmission mechanism of inflation targeting in the context of the length and costs of the disinflationary process. The objective of our paper is to employ econometric analysis to verify whether financial analysts’ and corporate managers’ inflation expectations in Czechia (from Q3 1999 to Q2 2024) show basic features of rational expectations and what impact the past YoY CPI inflation rate, the CNB’s inflation forecast and the CNB’s inflation target have on their expectations. We find that the formation of financial analysts’ and corporate managers’ yearly inflation expectations with time horizons of one year and three years differs considerably. For corporate managers’ inflation expectations, adaptive reasoning plays a more important role. Financial analysts take more account of the CNB’s one-year inflation forecasts in forming their yearly expectations, while the inflation target, as an explanatory variable, is statistically significant only for their three-year inflation expectations. Neither group of respondents meets the required criteria for rational expectations in terms of the tests formulated by Pesaran (1987), and Fama (1965 and 1970). In particular, their yearly inflation expectations exhibit systematic errors. Surprisingly, the time series of financial analysts’ inflation expectations contain a seasonal component.

Keywords
Inflation expectations, monetary policy, inflation targeting, Czech National Bank