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(Non)rationality of consumer inflation perceptions

Peter, Eckley (2015): (Non)rationality of consumer inflation perceptions.

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Abstract

We test the rationality of consumer inflation perceptions in Sweden, relaxing assumptions that have been maintained in previous literature. Specifically, we test the rational expectations hypothesis on survey measures of inflation perceptions, interpreted as nowcasts. We progressively relax restrictions on the prior set of loss functions against which the perception errors may be rationalised, culminating in the first application to inflation perceptions of the indicator test of Patton & Timmerman (2007). We find that inflation perceptions are positively biased in both the short- and long-run and thus reject RPH. This contrasts with earlier literature using data from the same survey. We also find that inflation perceptions fail to efficiently incorporate even the information implicit in past perception errors.

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