Forecasting Inflation Using Survey Expectations and Target Inflation: Evidence for Brazil and Turkey

39 Pages Posted: 17 Feb 2015

See all articles by Sumru Altug

Sumru Altug

American University of Beirut - Faculty of Arts & Sciences; Koc University - Department of Economics

Date Written: February 2015

Abstract

In this paper, we formulate a statistical model of inflation that combines data on survey expectations and the inflation target set by central banks. Our model produces inflation forecasts that are aligned with survey expectations, thereby integrating the predictive power of the survey expectations together with the baseline model. We further incorporate the inflation target set by the monetary authority to examine the effectiveness of monetary policy in forming inflation expectations and therefore, predicting inflation accurately. Results indicate superior predictive power of the proposed framework compared to the model without survey expectations as well as several popular benchmarks such as the backward and forward looking Phillips curves and naive forecasting rule.

Keywords: Inflation forecasting, inflation targeting, state space models, survey-based expectation, term structure of inflation expectations

JEL Classification: C32, C51, E31, E37

Suggested Citation

Altug, Sumru, Forecasting Inflation Using Survey Expectations and Target Inflation: Evidence for Brazil and Turkey (February 2015). CEPR Discussion Paper No. DP10419, Available at SSRN: https://ssrn.com/abstract=2566322

Sumru Altug (Contact Author)

American University of Beirut - Faculty of Arts & Sciences ( email )

P.O.Box 11-0236 / (Department)
Beirut
Lebanon

Koc University - Department of Economics ( email )

Rumeli Feneri Yolu
Sariyer 34450, Istanbul
Turkey
(90 212) 338 1673 (Phone)
(90 212) 338 1651 (Fax)

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