The Formation of Inflation Expectations under Changing Inflation Regimes

Dahl, Christian M.; Hansen, Niels Lynggård

doi:10.2202/1558-3708.1064

Cited by 5 publications

(3 citation statements)

References 32 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Statistical evidence is presented, showing that the actual price change rates can be characterized well by a two-state Markov regime-switching model. The empirical results support the expectation consistency hypothesis and also help explain the phenomenon of ex post bias in inflation forecasts, see, e.g., Evans and Wachtel (1993) and Dahl and Hansen (2001).…”

Section: Introductionsupporting

confidence: 75%

“…Thirdly, previous approaches test expectation consistency hypothesis by comparing expectations of the variable of interest with its ex post realizations. As pointed out by Evans and Wachtel (1993) and Dahl and Hansen (2001) this will, due to ex post bias, lead to too many false rejections of the expectation consistency hypothesis in situations where a structural break or a recurrent regime shift has occurred. By contrast, we model the variable of interest taking into account the possible of regime shifts, and the expectation consistency hypothesis is tested by comparing quantified expectations of the variable of interest from the survey data set with the mathematical expectation derived from the postulated behavioral/structural economic model.…”

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Quantification of Qualitative Survey Data and Test of Consistent Expectations

Dahl¹,

Xia²

2004

Journal of Business Cycle Measurement and Analysis

Self Cite

View full text Add to dashboard Cite

In this paper, we develop a likelihood approach for quantification of qualitative survey data on expectations and perceptions and we propose a new test for expectation consistency (unbiasedness). Our quatification scheme differs from existing methods primarily by using prior information (perhaps derived from economic theory or well established empirical relations) on the underlying process driving the variable of interest. To investigate the properties of our novel quantification scheme and to analyze the size and power properties of the new expectation consistency test, we perform Monte Carlo simulation studies. Overall, the simulation results are very encouraging and show that efficiency gains from including prior information can be substantial relative to existing quatification schemes. Finally, we provide an empirical illustration. We argue that a nonlinear regime switching model, historically, provides a more adequate characterization of prices changes in the British manufacturing industry relative to a wide range of alternative linear representations. We then show how to use this information to quantify the qualitative survey data on price change expectations and perceptions from the CBI survey in the U.K. manufacturing industry. Our findings support * Comments and suggestions from John Carlson and an anonymous referee are gratefully acknowledged. The notation used follows the "new" standard proposed by Abadir and Magnus (2002). The software developed for this paper is available from the authors upon request.the existence of so-called ex post bias, i.e., that rationally formed forecasts might appear biased when compared to ex post realizations. As a result, tests of expectation consistency by comparing forecasts with realizations become invalid. The new test we propose, however, is not affected by the existence of ex post bias and by applying this statistic we cannot reject the expectation consistency hypothesis.

show abstract

Section: Introductionsupporting

confidence: 75%

Section: Introductionmentioning

confidence: 99%

Quantification of Qualitative Survey Data and Test of Consistent Expectations

Dahl¹,

Xia²

2004

Journal of Business Cycle Measurement and Analysis

Self Cite

View full text Add to dashboard Cite

show abstract

“…1982Q3 In 1982 new government took office in Denmark and announced radical measures to tackle the economic crisis the country was experiencing, including a strong commitment to a fixed exchange rate policy. See Dahl and Hansen (2002) for more details.…”

Section: Canadamentioning

confidence: 99%

Exchange Rate Pass-Through and the Inflation Environment in Industrialized Countries: An Empirical Investigation

2004

View full text Add to dashboard Cite

This paper investigates the question of whether a transition to a low-inflation environment, induced by a shift in monetary policy, results in a decline in the degree of pass-through of exchange rate movements to consumer prices. It differs from previous empirical work in its focus on the identification of changes in the inflation environment and its use of a panel-data approach.Evidence from a panel-data set of 11 industrialized countries over the period from 1977 to 2001, supports the hypothesis that exchange rate pass-through declines with a shift to a low-inflation environment brought about by a change in the monetary policy regime. More specifically, the results suggest that pass-through to import, producer, and consumer price inflation declined following the inflation stabilization that occurred in many industrialized countries in the early 1990s but did not decline following a similar episode in the 1980s. Several potential explanations for this finding are discussed, including the possibility that changes in the monetary policy regimes implemented in the 1990s were perceived as more credible than those carried out in the 1980s, and the possibility that the credibility of the new monetary policy regimes was acquired over time.

show abstract

The Role of Expectations in Euro Area Inflation Dynamics

Paloviita

2005

SSRN Journal

View full text Add to dashboard Cite

Sivumäärä-Sidantal-Number of pages 88 Tiivistelmä-Referat-Abstract This paper examines empirical performance of three different Phillips curve specifications in the euro area. Instead of imposing rational expectations, direct measures, ie OECD forecasts, are used to proxy for economic agents' inflation expectations. Real marginal costs are measured in three different ways. The results suggest that with directly measured expectations the estimated New Classical Phillips curve has satisfactory statistical properties. Moreover, the driving variable enters the estimated purely forward-looking New Keynesian Phillips curve with a correct sign, but it is definitely outperformed by the New Classical and the Hybrid Phillips curve. We interpret our results as indicating that the European inflation process is not purely forward-looking, so that inflation cannot instantaneously adjust to new information. Consequently, even allowing for possible non-rationality in expectations, a lagged inflation term enters the New Keynesian Phillips curve for the European inflation dynamics. The inflation process seems to have become more forward-looking in the recent years of low and stable inflation. Furthermore, in the New Keynesian Phillips curve relationship the output gap turns out to be at least as good a proxy for real marginal costs as the labour income share.

show abstract

The Formation of Inflation Expectations under Changing Inflation Regimes

Cited by 5 publications

References 32 publications

Quantification of Qualitative Survey Data and Test of Consistent Expectations

Quantification of Qualitative Survey Data and Test of Consistent Expectations

Exchange Rate Pass-Through and the Inflation Environment in Industrialized Countries: An Empirical Investigation

The Role of Expectations in Euro Area Inflation Dynamics

Contact Info

Product

Resources

About