Optimal univariate expectations under high and persistent inflation: new evidence from Turkey
AbstractThe poor performance of sticky-price models with rational expectations in explaining the inflationary inertia in the US economy constitutes the basis for sticky-price models of near-rational expectations in the recent literature. However, previous studies on inflationary inertia in Turkey not only lack a model of nominal stickiness but also do not try to explain inflation persistence by expectations. Even though, there exists evidence for persistent inflation in Turkey as confirmed by earlier studies, and other studies provide evidence that expectations are neither perfectly rational nor purely adaptive, there is no attempt to link this near-rational behavior to inflationary inertia. Given this gap, this paper, therefore, tests empirically a sticky-price model under the assumption of near-rational expectations on two different inflation episodes in the Turkish economy. The near-rational expectations as described by optimal univariate expectations where agents use information on past inflation optimally while data on other variables are ignored, not only fit the data for both periods but also are not subject to Lucas critique. Alternatively, near-rational expectations are assumed to be backward looking. This alternative scenario shows that optimal univariate expectations perform even better during relatively higher inflation periods.
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Bibliographic InfoArticle provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.
Volume (Year): 346 (2005)
Issue (Month): 3 ()
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Optimal univariate expectations; Inflation inertia; Lucas critique; Turkish economy;
Other versions of this item:
- Vuslat Us & Kývýlcým Metin Ozcan, 2003. "Optimal Univariate Expectations under High and Persistent Inflation : New Evidence From Turkey," Working Papers 2003/4, Turkish Economic Association.
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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