Brissimis, Sophocles and Migiakis, Petros (2011): Inflation persistence and the rationality of inflation expectations.
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The rational expectations hypothesis for survey and model-based inflation forecasts − from the Survey of Professional Forecasters and the Greenbook respectively − is examined by properly taking into account the persistence characteristics of the data. The finding of near-unit-root effects in the inflation and inflation expectations series motivates the use of a local-to-unity specification of the inflation process that enables us to test whether the data are generated by locally non-stationary or stationary processes. Thus, we test, rather than assume, stationarity of near-unit-root processes. In addition, we set out an empirical framework for assessing relationships between locally non-stationary series. In this context, we test the rational expectations hypothesis by allowing the co-existence of a long-run relationship obtained under the rational expectations restrictions with short-run "learning" effects. Our empirical results indicate that the rational expectations hypothesis holds in the long run, while forecasters adjust their expectations slowly in the short run. This finding lends support to the hypothesis that the persistence of inflation comes from the dynamics of expectations.
|Item Type:||MPRA Paper|
|Original Title:||Inflation persistence and the rationality of inflation expectations|
|Keywords:||Inflation; rational expectations; high persistence|
|Subjects:||C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations ; Speculations
C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C50 - General
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications
|Depositing User:||Petros Migiakis|
|Date Deposited:||04 Mar 2011 19:20|
|Last Modified:||19 Jun 2016 05:06|
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Inflation persistence and the rationality of inflation expectations. (deposited 24 Feb 2011 18:33)
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