Inflation Expectations in the Euro Area: Indicators, Analyses and Models Used at Banca d’Italia

Abstract

This paper illustrates the tools used at Banca d’Italia (BI) to monitor the evolution of inflation expectations. The paper also surveys the analyses conducted at BI to assess how inflation expectations affect agents’ choices and the economy. The first part discusses the measures of inflation expectations derived from the prices of inflation-linked financial instruments and from the surveys of professional forecasters. The second part focuses on the measures of households’ and firms’ inflation expectations collected by BI, along with analyses presenting empirical evidence that expectations do indeed drive agents’ economic choices. The last part analyses the overall effect of exogenous changes of inflation expectations on the real economy, through the lens of the macroeconomic models used at BI.