Ilek, David and Ilek, Alex (2007): The Information Content of Inflationary Expectations Derived from Bond Prices in Israel.
Download (451kB) | Preview
In this paper we analyze the information content of data on inflationary expectations derived from the Israeli bond market. The results indicate that these expectations are unbiased and efficient with respect to the variables considered. In other words, we cannot reject the hypothesis that these expectations are rational. The existence of continuous data of this type, which is unique to the Israeli economy, enables us to test a number of hypotheses concerning the nature of price adjustment. The study found that expected inflation is a primary factor in the explanation of current inflation. This result is in agreement with the neo-Keynesian approach according to which the adjustment of prices is costly and as a result price increases in the present are determined primarily by expectations of future price increases. It was also found that inflation in Israel is better explained by the neo-Keynesian approach than by the Classical approach or the 'lack of information' approach according to which current inflation is determined by past, rather than current, inflationary expectations. Another issue examined in this study is whether inflationary inertia existed in Israel during the 1990s. From conventional estimation of an inflation equation (i.e. using future inflation as proxy for expectations) one can get the impression that there was strong inflationary inertia during this period. However, when data on inflationary expectations from the bond market were used in the estimation, this inertia (i.e. lagged inflation) became negative (and insignificant). This finding raise the possibility that inflationary inertia that is found elsewhere is not a structural phenomenon but an outcome of lack of reliable data on inflationary expectations.
|Item Type:||MPRA Paper|
|Institution:||Bank of Israel|
|Original Title:||The Information Content of Inflationary Expectations Derived from Bond Prices in Israel|
|Keywords:||Inflation; Rational Expectations;|
|Subjects:||E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E39 - Other|
|Depositing User:||david elkayam|
|Date Deposited:||04. Sep 2007|
|Last Modified:||14. Feb 2013 01:19|
Bibliography 1. Ball, L., Mankiw, G., and R. Reis (2003), "Monetary Policy for Inattentive Economies", NBER Working papers, No.w9491. 2. Brown B.W., S. Maital (1981), "What do Economists Know ? An Empirical Study of Expert's Expectations", Econometrica, Vol 49, No. 2, 491-504. 3. Calvo, G.A. (1983), "Staggered Contracts in a Utility-Maximizing Framework", Journal of Monetary Economics,12, 983-998. 4. Christiano, L.J., Eichenbaum, M. and C. Evans (2001), "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy", NBER Working Paper No. 8403. 5. Clarida, R., Gali, G. and M. Gertler (1999), “The Science of Monetary Policy: A New Keynesian Perspective”, Journal of Economic Literature,1661-1707. 6. Elkayam, D., A. Ilek (2004), "The Information content of inflationary expectations derived from bond prices in Israel", Bank of Israel, Monetary Department, Discussion papers series, 2004.03. 7. Friedman, M. (1968), "The Role of Monetary Policy", American Economic Review, 58, 1-17. 8. Fuhrer, J.C., G.R. Moore (1995), "Inflation Persistence", Quarterly Journal of Economics, 110, 127-160. 9. Fuhrer, J.C. (1997a), "Inflation/Output Variance Trade-Offs and Optimal Monetary Policy", Journal of Money, Credit and Banking,29(2), 214-234. 10. Fuhrer, J.C. (1997b), "The (Un)Importance of Forward-Looking Behavior in Price Specifications", Journal of Money, Credit, and Banking, 29(3),338-350. 11. Gali. J and Getler M. (1999), "Inflation Dynamics: A Structural Econometric Analysis", Journal of Monetary Economics, 44, 195-222. 12. Hansen, L.P. (1982), "Large Sample Properties of Generalized Method of Moments Estimators", Econometrica 50, 1029-1054. 13. Hansen, L.P. and Hodrick R.J (1980), "Forward Exchange Rates as Optimal Predictors of Future Spot rates: An Econometric analysis", The Journal of Political Economy, Vol 88, No. 5, 829-853. 14. Hayashi F. (2000). "Economertics", Princeton University Press. 15. Mankiw G., Reis R. (2001),"Sticky Information Versus Sticky Prices: A Proposal to Replace The New-Keynesian Phillips Curve", NBER working paper series, No.w8290. 16. McCallum, B. T. (1999). “Recent Development in Monetary Policy Analysis: The Role of Theory and Evidence”, working Paper 7088, NBER. 17. Newey, Whitney K. and Kenneth D. West (1987), "Simple, Positive Semidefinite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix", Econometrica 55, 703-708. 18. Phelps, E. S. (1967), "Phillips Curve, Expectations of Inflation, and Optimal Unemployment Over Time", Economica, 34, 254-284. 19. Rich, R.W. (1989), "Testing the Rationality of inflation Forecasts from Survey Data: Another Look at the SRC Expected Price Change Data", The Review of Economics and Statistics, Vol.71, No.4, 682-686. 20. Roberts, J. M. (1995), "New Keynesian Economics and the Phillips Curve", Journal of Money, Credit and Banking, Vol 27, No. 4, Part1, 975-984. 21. Roberts, J. M. (1997), "Is inflation sticky ?", Journal of Monetary Economics, 39,173-196. 22. Roberts, J. M. (1998), "Inflation Expectations and the Transmission Of Monetary Policy", Finance and Economics Discussion series, Board of Federal Reserve System (U.S). 23. Roberts, J. M. (2001), "How Well Does the New Keynesian Sticky-Price Model Fit the Data?", Finance and Economics Discussion series, Board of Federal Reserve System (U.S). 24. Rotemberg J.J (1987), "New Keynesian Microfoundations", in S. Fisher (ed.), NBER Macroeconomics Annual , Cambridge, MA: MIT Press, 69-104. 25. Rudebusch, G.D. (2002), "Assessing Nominal Income Rules for Monetary Policy with Model and Data Uncertainty", The Economic Journal", 112(479), 402-432. 26. Taylor, J.B. (1979), "Staggered Contracts in a Macro Model", American Economic Review, 69, 108-113. 27. Walsh, C. E (2003), "Monetary Theory and Policy", Second edition, The MIT Press, Cambridge, Massachusetts, London, England. 28. Woodford, M. (2003), "Interest and Prices" ,Princeton University Press. 29. Yariv, D. (1990),"An Estimate of Inflationary Expectations in Israel under The Disinflation Programs of 1984-85", Bank of Israel Economic Review, 64, 51-70.