will be leakages and other set - offs. but our external situation undoubtedly improves. the welcome development enhances our disposable income ( which will increase consumer demand for other goods and services ), reduce input cost of our businesses ( which will increase margins and help to enthuse investment demand ), and aid government finances by reducing the energy subsidy burden in the budget. let me conclude by quoting a participant at the inaugural session of this year ’ s vibrant gujarat global summit : “ india will be a bright spot in an otherwise mediocre global economic outlook ”. thank you, once again, for giving me the opportunity to speak at the 7th business standard best b - school project awards function. bis central bankers ’ speeches

fluctuations : a perspective from time - series analysis ) ”, gendai keizaigaku no chouryuu ( contemporary trends in economics ), toyo keizai inc., 2011, pp. 35 – 65 ( available in japanese ). bis central bankers ’ speeches through an improvement in the income balance, the country ’ s net assets will increase, thereby exerting positive effects on consumption. 2. people ’ s inflation expectations : forward - looking expectation formation people ’ s inflation expectations have been rising on the whole. for example, in terms of shortterm inflation expectations such as those for fiscal 2013 or for a year ahead, many indicators – including the results of surveys conducted on households, economists, and market participants – show a gradual rise. medium - to long - term inflation expectations, such as for five and ten years ahead, are also rising, according to surveys conducted on economists ( chart 14 ). let me elaborate on how people form expectations of future inflation rates. generally speaking, there are two ways to predict economic variables. one is backward - looking expectation formation, where past results are directly used to form expectations. a typical example is that the inflation rate for the previous period is simply assumed as the expected future inflation rate. in this case, expectations for future inflation rates are fixed to actual past inflation rates. the other is forward - looking expectation formation, where future inflation rates are predicted in line with the underlying mechanism of future developments in economic activity. as an example, let us simply consider the phillips curve and assume that prices rise when economic activity improves. given this, when prospects for a sustainable improvement in economic activity are widely acknowledged in view of efforts to strengthen the foundations for economic growth and the spread of policy effects, people expect a rise in prices based on the relationship between economic activity and prices at a future point in time – in other words, inflation expectations will rise. meanwhile, in the corporate sector, better prospects for economic activity and sales will enable firms to ease price competition and pass higher costs on to selling prices. as a result, prices for the present period will likely incur upward pressure, thereby shifting the entire observed phillips curve upward, or making the curve steeper than before. in the actual formation of inflation expectations, aspects of both the backward - looking and forward - looking formations are considered to coexist. this is called hybrid - type expectation formation. based on past experiences, the aspect of backward - looking expectation formation is prominent in japan. on the