Are Survey-Based Inflation Expections in the Euro Area Informative?

67 Pages Posted: 20 Feb 2007

Date Written: February 2007

Abstract

This paper contributes to the old theme of testing for rationality of inflation expectations in surveys, using two very different surveys in parallel. Focusing on the euro area and using two well-known surveys that include questions on inflation expectations, the Consensus Forecast survey and the European Commission Household survey, a battery of tests is applied to inflation forecasts. Tests are based on a preliminary discussion of the meaning of Rational Expectations in the macroeconomic literature, and how this maps into specific econometric tests. Tests used are both standard ones already reported in the literature and less standard ones of potential interest within the framework discussed. Tests focus on in-sample properties of the forecasts, both in static and dynamic settings, and in out-of-sample tests to explore the performance of the forecasts in a simulated out-of-sample setting. As a general conclusion, both surveys are found to contain potentially useful in-formation. Although the Consensus Forecasts survey is the best one in terms of quality of the forecasts, rationality in the European Commission Household survey, once measurement issues are taken into account, cannot be ruled out.

Keywords: Rational expectations, tests of rationality, inflation forecasting

JEL Classification: C40, C42, C50, C53, E37

Suggested Citation

Mestre, Ricardo, Are Survey-Based Inflation Expections in the Euro Area Informative? (February 2007). ECB Working Paper No. 721, Available at SSRN: https://ssrn.com/abstract=958287

Ricardo Mestre (Contact Author)

European Central Bank (ECB) ( email )

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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
108
Abstract Views
923
rank
281,997
PlumX Metrics