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On the rationality and efficiency of inflation forecasts: Evidence from advanced and emerging market economies

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  • Jalles, João Tovar

Abstract

This paper provides a full characterization of inflation rate forecasts using the mean values from Consensus Economics for a sample of 78 advanced and emerging economies between 1989 and 2014. It also assesses the performance of inflation rate forecasts around business cycles’ turning points. As expected, that inflation forecasts start to mirror the actual data as the forecast horizon draws to a close, particularly in advanced economies. The mean forecast error is positive and larger than one point when we pool all countries, but this masks inter-group differences. Moreover, we find evidence for biasedness, inefficiency or information rigidities, with a clear tendency for “forecast smoothing”. Accounting for cross-country informational linkages is important: forecasters fail to adjust their inflation forecasts quick enough in response to domestic news and news from abroad. Finally, during recession episodes forecasts generally appear to be inefficient. The same holds true for recoveries.

Suggested Citation

  • Jalles, João Tovar, 2017. "On the rationality and efficiency of inflation forecasts: Evidence from advanced and emerging market economies," Research in International Business and Finance, Elsevier, vol. 40(C), pages 175-189.
    • Handle: RePEc:eee:riibaf:v:40:y:2017:i:c:p:175-189
    DOI: 10.1016/j.ribaf.2017.01.007
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    More about this item

    Keywords

    Forecast comparison; Bias; Efficiency; Information rigidity; Recession; Recovery;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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