frequency and more extensive range of horizons than survey-based measures.<sup>1</sup> The following section reviews the theoretical and empirical literature on the formation and anchoring of inflation expectations. Despite a lack of consensus on the theoretical framework that best captures the behavior of inflation expectations, the empirical literature has concluded that an inflation targeting regime helps improve the anchoring of expectations in both advanced economies and EMDEs.

The next section examines trends in long-term (five-year-ahead) inflation expectations in advanced economies and EMDEs, from the 1990s to the present. It then assesses the anchoring of inflation expectations. It finds that although expectations have become more firmly anchored during the past decade in both advanced economies and EMDEs, this has been less evident in EMDEs than in advanced economies. The section also reports that inflation expectations in EMDEs are more sensitive to both global and domestic shocks than are inflation expectations in advanced economies, although sensitivity to global shocks has fallen in both groups of economies and sensitivity to domestic shocks has fallen in EMDEs.

The subsequent section identifies the main factors that determine the anchoring of inflation expectations. It presents evidence that inflation expectations are better anchored in both advanced economies and EMDEs when the central bank employs an inflation targeting regime and is highly transparent. For EMDEs, low public debt and a high degree of trade openness are also associated with better anchoring of expectations, while the use of a fixed exchange rate regime is associated with weaker anchoring of expectations. These results suggest that the institutions and framework of monetary policy, the macroeconomic environment (including fiscal policy), and structural characteristics all matter for the anchoring of long-term inflation expectations in EMDEs.

The penultimate section presents case studies on the experience of inflation targeting in Brazil, Chile, and Poland. The conclusions of the case studies are in line with the empirical findings. In Brazil, less than ideal fiscal conditions and worsening central bank transparency during part of the inflation targeting period may have impeded the anchoring of expectations. By contrast, the combination of high central bank credibility and an effective fiscal framework may have helped anchor expectations in Chile. In Poland, the transition to a flexible exchange rate regime concurrent with the adoption of inflation targeting may have helped to anchor expectations.

The final section concludes with a summary of major findings and a discussion of future research directions.

# 2. Measuring inflation expectations

Robust measurement is key to evaluating inflation expectations, and typically two sources exist. Survey-based measures are derived from surveys of households, firms, or professional forecasters, in which respondents are asked about their expectations for inflation at various horizons. Market-based measures are calculated from the prices of assets linked

> 1 For background on market- and survey-based measures of inflation expectations, see Coibion et al. (2018) and Grothe and Meyler (2018) for the United States and the Euro Area, and Sousa and Yetman (2016) for EMDEs.

3