Inflation Dynamics and the Role of Expectations: Evidence from the Ifo World Economic Survey

Preliminary Version We provide evidence on the fit of the hybrid New Keynesian Phillips curve for selected euro zone countries, the US and the UK. Instead of imposing rational expectations and estimating the Phillips curve by the Generalized Method of Moments, we follow Roberts (1997) and Adam and Padula (2003) and use direct measures of inflation expec-tations. The data source is the Ifo World Economic Survey which quarterly polls economic experts about their expected future develop-ment of inflation. Our main findings are as follows: (i) In comparison with the rational expectations approach backward-looking behavior turns out to more relevant for most countries in our sample. (ii) The use of survey data for inflation expectations yields a positive and sig-nificant slope of the Phillips curve when the output gap is used as a