The Rationality of Consumers' Inflation Expectations: Survey-Based Evidence for the Euro Area

40 Pages Posted: 14 May 2003

See all articles by Magnus Forsells

Magnus Forsells

European Central Bank (ECB)

Geoff Kenny

European Central Bank (ECB)

Date Written: August 2002

Abstract

This paper uses survey data to assess consumers' inflation expectations in the euro area. The probability approach is used to derive quantitative estimates of inflation expectations from the European Commission's Consumer Survey. The paper subsequently analyses the empirical properties of the estimated inflation expectations by considering the extent to which they fulfil some of the necessary conditions for rationality. The results suggest an intermediate form of developments and they incorporate - though not always completely - a broad set of macroeconomic information. In addition, although persistent deviations between consumers' expectations and the rational outcome have occurred, consumers are shown to rationally adjust their expectations in order to eventually "weed out" any systematic expectational errors. Interestingly, perhaps reflecting changes in the monetary regime, there is also evidence of "growing" rationality over the 1990s compared with the 1980s.

Keywords: Inflation expectations, Surveys, Rationality, Euro area

JEL Classification: D12, D84, E31

Suggested Citation

Forsells, Magnus and Kenny, Geoff, The Rationality of Consumers' Inflation Expectations: Survey-Based Evidence for the Euro Area (August 2002). Available at SSRN: https://ssrn.com/abstract=358021

Magnus Forsells (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

Geoff Kenny

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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