On the External Validity of Experimental Inflation Forecasts: A Comparison with Five Categories of Field Expectations (original) (raw)

Inflation Expectations: Does the Market Beat Professional Forecasts?

2009

The present paper compares expected inflation to (econometric) inflation forecasts based on a number of forecasting techniques from the literature using a panel of ten industrialized countries during the period of 1988 to 2007. To capture expected inflation we develop a recursive filtering algorithm which extracts unexpected inflation from real interest rate data, even in the presence of diverse risks and a potential Mundell-Tobin-effect. The extracted unexpected inflation is compared to the forecasting errors of ten econometric forecasts. Beside the standard AR(p) and ARMA(1,1) models, which are known to perform best on average, we also employ several Phillips curve based approaches, VAR, dynamic factor models and two simple model avering approaches.

Exploring Survey‐Based Inflation Forecasts

2011

This paper first shows that survey-based expectations (SBE) outperform standard time series models in U.S. quarterly inflation out-of-sample prediction and that the term structure of survey-based inflation forecasts has predictive power over the path of future inflation changes. It then proposes some empirical explanations for the forecasting success of survey-based inflation expectations. We show that SBE pool a large amount of heterogeneous information on inflation expectations and react more flexibly and accurately to macro conditions both contemporaneously and dynamically. We illustrate the flexibility of SBE forecasts in the context of the recent financial crisis.

A ‘rational’ explanation for ‘irrational’ forecasts of inflation

Journal of Monetary Economics, 1984

This paper analyzes professionals' forecasts of nominal income and the inflation rate. The analysis indicates that both monetary and fiscal policy data was used efficiently to forecast income. but the monetary policy data was not used efficiently to forecast the inflation rate. Further analvsi~ suggests that the apparent inefficient use of the monetary data r;;~uits from the non-,tatione money-inflation relatiomhip predicted by rational expectations models. These models then provide an explanation for the inconsistent coaclusions regarding the income forecasts and the inflation rate forecasts.

Inflation expectations formation in the presence of policy shifts and structural breaks: An experimental analysis

The Journal of Socio-Economics, 2013

In this paper we study how in ‡ation expectations are formed and whether these change due to the occurrence of policy shifts or structural breaks. We conduct 4 experiments with 75 inexperienced subjects, in which we ask them to predict future home in ‡ation and report con…dence intervals. At three points in time during our experiments, we also ask our participants to provide additional information regarding the uncertainty about their expectations. Our design allowed us to gather 6750 home in ‡ation point forecasts and con…dence intervals. We …nd that: (1) in ‡ation expectations are seldom rational; (2) our subjects generally ignore valuable information and, instead, tend to pay close attention to past trends; (3) the adoption of in ‡ation targeting increases the amount of subjects that forecast in a rational fashion and reduces the uncertainty about future in ‡ation; and (4) a recession reduces rationality among forecasters, yet induces them to expect in ‡ation to revert to its mean.

Empirical comparison of inflation models' forecast accuracy

2000

Forecasting inflation is important in practical monetary policy, and in- creasingly so in countries who have adopted inflation targeting as their oper- ative monetary policy regime. Inflation models are however contested. Rival models are shown to have different forecasting properties over a period that covers a change in regime in the Norwegian economy—from high to low infla- tion. There is

CREATES Research Paper 2008-56 Disagreement and Biases in Inflation Expectations

2008

Disagreement in inflation expectations observed from survey data varies systematically over time in a way that reflects the level and variance of current inflation. This paper offers a simple explanation for these facts based on asymmetries in the forecasters’ costs of overand under-predicting inflation. Our model implies (i) biased forecasts; (ii) positive serial correlation in forecast errors; (iii) a cross-sectional dispersion that rises with the level and the variance of the inflation rate; and (iv) predictability of forecast errors at different horizons by means of the spread between the shortand long-term variance of inflation. We find empirically that these patterns are present in inflation forecasts from the Survey of Professional Forecasters. A constant bias component, not explained by asymmetric loss and rational expectations, is required to explain the shift in the sign of the bias observed for a substantial portion of forecasters around 1982.

Inflation expectations: Does the market beat econometric forecasts?

The North American Journal of Economics and Finance, 2011

The present paper compares expected inflation to (econometric) inflation forecasts based on a number of forecasting techniques from the literature using a panel of ten industrialized countries during the period from 1988 to 2007. To capture expected inflation, we develop a recursive filtering algorithm that extracts unexpected inflation from real interest rate data, even in the presence of diverse risks and a potential Mundell-Tobin-effect. The extracted unexpected inflation is compared to the forecasting errors of ten econometric forecasts. In addition to the standard AR(p) and ARMA(1,1) models, which are known to have the best performance on average, we also employ several Phillips curvebased approaches, VAR, dynamic factor models and two simple model averaging approaches. Finally, we show that the quality of the expectations clearly matches the quality of the forecasts derived with the techniques that are currently proposed for this purpose in the economic literature.

Inflation Forecasts: Are Market-Based and Survey-Based Measures Informative?

International Journal of Financial Research

This paper analyses the predictive power of market-based and survey-based inflation expectations for actual inflation. We use the data on inflation swaps and the forecasts from the Survey of Professional Forecasters for the euro area and the United States. The results show that both market-based and survey-based measures have a non-negligible predictive power for inflation developments, as compared to statistical benchmark models. Therefore, for horizons of one and two years ahead, market-based and survey-based inflation expectations actually convey information on future inflation developments.