Has the economic crisis of 2007-2009 changed the expectation formation process in the Euro area?

We use the ECB's Survey of Professional Forecaster to show that euro area expectations are consistent with standard macroeconomic building blocks such as the Phillips curve, Okun's law, and the Taylor rule. Moreover, the paper finds that the financial and economic crisis of 2007-2009 did not change the expectation formation process as professional forecasters still adopt macroeconomic building blocks for their forecast. The skepticism that has recently been raised concerning macroeconomic building blocks has apparently not yet affected professional forecasts. On the contrary, we conclude that professional forecasters still have faith in macroeconomic building blocks.

Research highlights► First study which analyzes the expectations formation process in the euro area. ► Euro area forecasters apply macroeconomic building blocks to forecast macroeconomic variables. ► Expectations formations process has not changed during the recent financial and economic crisis. ► Evidence that forecasters expect the ECB to respond to inflation to a lower extent during the crisis.