Authors: Prof. Dr. André Tomfort
Empirical findings of this paper show that past inflation rates as well as forward-looking expectations are dominant explanatory forces for the inflation process over a horizon of three years. These results favour the hybrid version of the NPKC instead of the pure version. The picture seemed to be somewhat different for the longer time horizons where past inflation rates clearly had a stronger explanatory power than forward-looking expectations. A possible explanation is that with the length of the forecast horizon uncertainty is increasing substantially so that economic agents base their decision rather on past experiences. If this was true, than inflation (or deflation) dynamics are of sticky nature and hard to break for a central bank. A specific analysis for inflation expectations showed that they contain forward-looking elements as well as past inflation rates supporting the findings of the inflation process.
Keywords: Inflation, inflation expectations, expectation indicators, cointegration