Jens Weidmann: Expectations matter

Welcoming remarks by Dr Jens Weidmann, President of the Deutsche Bundesbank and Chairman of the Board of Directors of the Bank for International Settlements, at the Joint Deutsche Bundesbank-Bank of France Conference on Household Expectations, Frankfurt am Main, 26 September 2019.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Central bank speech  | 
30 September 2019

1 Introduction

Governor Villeroy de Galhau, dear François,

Ladies and gentlemen, dear colleagues,

It is my great pleasure to give you all a warm welcome to this get-together at the Bundesbank guest house to set the tone for our joint conference with the Banque de France on household expectations.In the early 20th century, the world was stunned. Wilhelm von Osten, a German mathematics teacher, presented a horse which appeared to be able to correctly perform arithmetic calculations. The horse, called "Kluger Hans" (or "Clever Hans"), could also read the clock, form sentences and reply to other questions, giving answers by tapping his hoof. A public commission was set up to study this intelligent animal, but could find no evidence of a hoax. It was a young researcher who eventually discovered what was going on. After years of training, "Clever Hans" was able to identify tiny changes in the questioners' facial expressions that unintentionally signalled the expected behaviour. Without facial contact, the horse could not perform any of the tasks. This shows that observers' expectations can impact the observation.

Similarly, our economies are not just mechanical systems combining labour input, capital and technology: they are also driven by our expectations. At least since John Muth introduced the concept of rational expectations in 1961, it has been the case that expectations of economic agents play a key role for both economic theory and policy. After the experience of stagflation in the 1970s, central banks around the world today acknowledge the importance of anchoring inflation expectations and preserving the credibility of monetary policy This is also reflected in estimates of the Phillips curve which demonstrate that inflation expectations are one of the key determinants of actual inflation.

2 Taking different inflation expectations into account