The Distributional Predictive Content of Measures of Inflation Expectations
53 Pages Posted: 1 Dec 2023
Date Written: November 30, 2023
Abstract
This paper examines the predictive relationship between the distribution of realized inflation in the US and measures of inflation expectations from households, firms, financial markets, and professional forecasters. To allow for nonlinearities in the predictive relationship we use quantile regression methods. We find that the ability of households to predict future inflation, relative to that of professionals, firms, and the market, increases with inflation. While professional forecasters are more accurate in the middle of the inflation density, households’ expectations are more useful in the upper tail. The predictive ability of measures of inflation expectations is greatest when combined. We show that it is helpful to let the combination weights on different agents’ expectations of inflation vary by quantile when assessing inflationary pressures probabilistically.
Keywords: inflation expectations measures, inflation, density forecasts, quantile predictive regressions, non-Gaussian models, nonlinearities
JEL Classification: C15, C53, E3, E37
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