Rational Expectations and Fixed-Event Forecasts: An Application to UK Inflation
Bank of England Working Paper No. 176
29 Pages Posted: 12 Aug 2003
Date Written: February 2003
This paper tests a version of the rational expectations hypothesis using 'fixed-event' inflation forecasts for the UK. Fixed-event forecasts consist of a panel of forecasts for a set of outturns of a series at varying horizons prior to each outturn. The forecasts are the prediction of fund managers surveyed by Merrill Lynch. Fixed-event forecasts allow tests for whether expectations are unbiased in a similar fashion to the rest of the literature. But they also permit particular tests of forecast efficiency to be conducted - whether the forecasts make best use of available information- that are not possible with rolling event data. The results show evidence of a positive bias in inflation expectations. Evidence for inefficiency is much less clear cut.
Keywords: Fixed-event forecasts, rational expectations, forecast efficiency
JEL Classification: C12, E37
Suggested Citation: Suggested Citation