Formation of inflation expectations in the U.K.: Pitfalls in the use of the error-learning model

This paper examines the formation of explicitly-reported price expectations in the UK. Expectations are formed over a long period, and a general distributed lag provides a superior explanation to that provided by a second-order error-learning form. The error-learning mechanism is shown to be biased when lagged expectations incorporate a random shock, and when expectations are reported more frequently than the length of the forecast horizon.