Inflationary Expectations in New Zealand: A Preliminary Study

Abstract:     
Any investigation into a potential quantitative role for inflationary expectations can proceed in three steps. The first, to obtain or construct time series data which represent the expected rate of inflation; the second, to research how such inflationary expectations could have been formed; and the third, to examine the extent to which the expected rate of inflation can explain the actual rate.

Early econometric research focused on the third step only, and in so doing had to make do with indirectly measured expected rate of inflation variables. That is, the expectational time series data were generated from some assumed hypothesis expressing expected prices in terms of previous actual prices. This approach clearly had the disadvantage of forcing on the generated expectations series a predetermined idea of how the decision-maker’s expectations were formed, meant that step two above was imposed by assumption rather than established by testing, and was the result of researchers failure to come up with an independent direct measure of inflationary expectations.

Keywords: Inflation expectations, New Zealand, Time series

JEL Classification: D84, E31, C82

Accepted Paper Series