SPEECH

Expectations surveys, central banks and the
economy

Welcome address by Luis de Guindos, Vice-President of the ECB, at
the 5th joint ECB, Bank of Canada and Federal Reserve Bank of
New York Conference on expectations surveys, central banks and
the economy

Frankfurt am Main, 1 October 2024

It is my pleasure to welcome you to this fifth joint conference on expectations surveys organised by the
European Central Bank, the Bank of Canada and the Federal Reserve Bank of New York.

In my remarks today, I will delve into the fascinating world of expectations surveys and their relevance
to central banks. I will review how useful expectations surveys have proven to be for central banks
over the period since 2019, the year we held our first conference in this series. In addition, I will touch
on the challenges facing central banks in using surveys. The fact that central banks generally operate
under great uncertainty has come to the fore over the past five years. Today, too, we are facing huge
uncertainty - not least in view of the many prevailing economic, financial and geopolitical risks. Yet, it
is precisely in this unpredictable and highly complex landscape that surveys have come into their own.

The return of survey expectations

Over the past decade, central banks and other policymaking institutions have invested significantly in
expectations surveys and have drawn increasingly on survey data for their policy analysis and
research. These surveys cover consumers, firms, financial market participants and other experts,
including professional forecasters. At the ECB, we can fortunately look to a wide array of such surveys
covering diverse topics such as consumer expectations, household finance and consumption, access
to finance of enterprises, the payment attitudes of consumers and bank lending. Since 2013, the ECB
has also conducted a survey of wholesale market participants on credit terms and conditions, and it
recently developed a new survey of monetary analysts to collect expert expectations about key
monetary policy parameters and concepts. Finally, the ECB's Survey of Professional Forecasters was
launched back in 1999 at the start of Economic and Monetary Union. Its structured collection of data
has supported a rich research programme investigating economic forecasts and expert expectations.
4]

All ECB surveys can provide insights into how different economic agents form and update their
expectations. They can reveal the potential biases in these expectations and the extent to which
expectations feed into economic decisions. Surveys were indeed quite central to the economic debate
in the 1950s and the 1960s but their role became more marginal when rational expectations were
incorporated into economic modelling in the 1970s. Over the past ten years, however, economists

have seen survey expectations clearly returning to the mainstream.!2] One could describe the recent
growth in survey-based research as a "counter-revolution" following the earlier "revolution" centred on
rational expectations. Today, while models based on rational expectations still form a useful reference
point in our analysis and research, they are no longer thought to provide a solid basis for
understanding business cycles, for gauging the risks of financial crises or for designing effective
economic policies. The central insight gained from this new line of survey-based research is that many
economic agents may systematically form expectations by using partial sets of information or by
following subjective narratives about how the economy functions - for example by applying simple

rules of thumb.) It is important to understand such subjective expectations, because these beliefs
often underlie the economic choices and financial decisions that drive the economy.

Surveys have repeatedly proven their usefulness over the past five years. During the COVID-19
pandemic, they were especially useful in helping to track financial conditions for firms and households,
as well as in estimating the labour market response to the pandemic shock. Online surveys were of
great benefit during the pandemic as in-person survey interviews were hampered by lockdown
restrictions. For example, the ECB's Consumer Expectations Survey - an online survey which was
fortuitously launched in early 2020 - helped us understand the severity of the pandemic-induced
collapse in consumption and gauge the overall effectiveness of the major policy interventions by

governments and other authorities at the time.

Insights from surveys during the recent period of high inflation
More recently, the data collected in surveys strongly supported the analysis of the recent inflationary

episode in the euro area. During the early phase of the inflation surge in 2022, survey data helped to
inform the central discussion on the likely persistence of the shock. For example, the observed
increase in consumers' medium-term expectations may have interacted with an increase in firms'
pricing power to make the original supply shocks more persistent than they would otherwise have

been.

Forces that would gradually help bring inflation back down to our target were also visible in more
recent survey data. For example, we could see how the rise in inflation and inflation expectations was
acting as a major constraint on demand and consumer spending owing to its impact on real incomes.
In August 2023 respondents to the ECB's Consumer Expectations Survey were asked what actions
they were planning to take in light of their expectations about future inflation. The results clearly
showed that a much higher share of consumers planned to reduce their spending in response to the

expectations of higher prices.!2 In addition, consumers indicated that they would start to shop around
more and buy cheaper varieties of goods and services than they normally would. In a context where
the ECB was taking decisive monetary policy action aimed at restoring price stability, these
behavioural responses to higher inflation expectations also contributed to the gradual unwinding of the
inflationary pressures across the euro area economy.

Insights for financial stability analysis

In addition to monetary policy, expectations surveys are now increasingly being used for other central
bank tasks as well. This includes financial stability analysis. Here, surveys can help identify potential
sources of financial risk not only in financial markets and the banking system, but also in the

household and non-financial corporate sectors.!2! Even when there is no discernible financial stress at
the aggregate level, the disaggregated or individual-level data typically provided by surveys can help
us to identify emerging risks across particular sectors or socio-demographic groups.

In financial stability analysis, the topic of financial literacy is receiving increased attention. In the first
keynote lecture of the conference, Professor Annamaria Lusardi from Stanford University will talk
about why financial literacy is relevant for central banks. One consideration for financial stability
analysis is that less financially literate households may be less prepared to cope with adverse
economic and financial shocks. Yet, these households tend to be the most exposed to such shocks
and more heavily affected when they occur. Policies seeking to boost financial literacy may help
borrowers to source loans that are cheaper to service, thus promoting more efficient and more
sustainable debt management. These issues may be particularly relevant for real estate markets and
housing, which will be the focus of the second keynote lecture of the conference, given by Professor
Tarun Ramadorai from Imperial College London. Professor Ramadorai will discuss the importance of
non-rational beliefs in the housing market and how household surveys can help inform policies that
can address these frictions.

Sustaining the quality and representativeness of surveys

Our experiences with survey data also highlight the challenges that policymakers face when using
these data. Survey data can be volatile and there is evidence of overreaction in both household and
firm surveys of expectations. For this reason, surveys may provide a noisy signal for policymaking in
practice, which complicates how these data should feed into the policy reaction function. In this
respect, I hope the research presented at today's conference can also help policymakers distinguish
the signal from the noise that is always embedded in expectations data. These considerations
underline the importance of the quality of the survey design, including the sampling and data collection
methods. It is crucial that questions are designed to avoid the framing of responses and that the
complexity of the questionnaires is managed appropriately to avoid survey fatigue, which may
negatively affect data quality. As central banks are making increasing use of survey data, they need to
continuously and carefully monitor these data to ensure responses remain representative of the

underlying population's beliefs and behaviour.

Conclusion

Let me conclude. Today, expectations surveys are an important part of the toolkit available to central
banks for their policy analysis. These surveys reveal insights about the economy that would otherwise
remain hidden from view. As a result, they can contribute to more robust policy decisions and better
policy assessments.

I would like to finish by thanking the presenters and participants in advance for their contributions and

the conference organisers for putting together such an impressive programme. I wish you all a
productive and successful two days of lively debate and discussion. I am confident that the insights

that will emerge from sharing our experiences of different surveys across many countries and
institutions will ultimately enhance the way in which we use expectations surveys to help guide policy
decisions.

1.

See ECB surveys.

2.

See Coibion, O., Gorodnichenko, Y. and Kamdar, R. (2018), "The Formation of Expectations, Inflation,
and the Phillips curve", Journal of Economic Literature, Vol. 56, No 4, pp. 1447-1491; D'Acunto, F.,
Charalambakis, E., Georgarakos, D., Kenny, G., Meyer, J. and Weber, M. (2024), "Household inflation

expectations: An overview of recent insights for monetary policy", Discussion Paper Series, No 24,

ECB; Shleifer, A., (2019), "The return of survey expectations", NBER Reporter, No 1, pp. 14-17.

3.

See Andre, P., Pizzinelli, C., Roth, C. and Wohlfart, J. (2022), "Subjective models of the
macroeconomy: Evidence from experts and representative samples", The Review of Economic
Studies, Vol. 89, No 6, pp. 2958-2991; Weber, M., Candia, B., Afrouzi, H., Ropele, T., Lluberas, R.,
Frache, S., Meyer, B.H., Kumar, S., Gorodnichenko, Y., Georgarakos, D., Coibion, O. and Kenny, G.
(2024), "Tell me something I don't already know: learning in low and high-inflation settings", Working
Paper Series, No 2914, ECB, March, shows that the attention of both consumers and firms to inflation
depends on the level of inflation. In particular, consumers and firms don't pay much attention to official
news about inflation when inflation is low, but they are much more attentive and informed about

inflation developments when inflation is high.

4.

See Manski, C.F. (2004), "Measuring expectations", Econometrica, Vol. 72, No 5, pp. 1329-1376;
Manski, C.F. (2018), "Survey measurement of probabilistic macroeconomic expectations: progress and
promise", NBER Macroeconomics Annual, Vol. 32, No 1, pp. 411-471.

5.

See, for example, Christelis, D., Georgarakos, D., Jappelli T. and Kenny, G. (2020), "The Covid-19

crisis and consumption: survey evidence from six EU countries", Working Paper Series, No 2507,

ECB, December and Georgarakos, D. and Kenny, G. (2022), "Household spending and fiscal support
during the COVID-19 pandemic: Insights from a new consumer survey", Journal of Monetary

Economics, Vol. 129, pp. S1-S14.

6.
For a recent review of the insights for monetary policy from research using household inflation

expectations see D'Acunto, F. et al. (2024), op. cit.

7.

See Acharya, V.V., Crosignani, M., Eisert, T. and Eufinger, C. (2023), "How do supply shocks to
inflation generalize? Evidence from the pandemic era in Europe", NBER Working Paper, No 31790, as
well as the discussion in D'Acunto, F. et al. (2024); Baumann, U., Ferrando, A., Georgarakos, D.,

Gorodnichenko, Y. and Reinelt, T. (2024), "SAFE to update inflation expectations? New survey

evidence on euro area firms", Working Paper Series, No 2949, ECB, uses the ECB's Survey on
Access to Finance of Enterprises and demonstrates a causal effect of changes in inflation
expectations on firms' price-setting decisions with a 1.0 percentage point increase in inflation

expectations leading firms to plan an increase of 0.3% in their selling prices.

8.
See also D'Acunto, F. et al. (2024), op. cit.

9.

K6rdel and Molitor (2023) discuss how SESFOD has contributed to the determination of market
participants' risk appetite. Dieckelmann and Metzler (2022) use the HFCS to analyse how household
inequality is central to the assessment of financial stability risks. See K6rdel, S. and Molitor, P. (2023),
"SESFOD@10 - credit terms and conditions in euro-denominated securities financing_and over-the-

counter derivatives markets since 2013", Economic Bulletin, Issue 6 and Dieckelmann, D. and Metzler,

J. (2022), "Household inequality and financial stability risks: exploring the impact of changes in

consumer prices and interest rates", Financial Stability Review, ECB, November.

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