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Rational expectations and fixed-event forecasts: An application to UK inflation

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  • H. Bakhshi
  • G. Kapetanios

    ()

  • T. Yates

Abstract

In this paper a version of the rational expectations hypothesis is tested using fixed-event inflation forecasts for the UK. Fixed-event forecasts consist of a panel of forecasts for a set of outturns of a series at varying horizons prior to each outturn. The forecasts are the prediction of fund managers surveyed by Merrill Lynch. Fixed-event forecasts allow tests for whether expectations are unbiased in a similar fashion to the rest of the literature. But they also permit particular tests of forecast efficiency to be conducted - whether the forecasts make best use of available information - that are not possible with rolling event data. The results show evidence of a positive bias in inflation expectations. Evidence for inefficiency is much less clear cut.

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

Article provided by Springer in its journal Empirical Economics.

Volume (Year): 30 (2005)
Issue (Month): 3 (October)
Pages: 539-553

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Handle: RePEc:spr:empeco:v:30:y:2005:i:3:p:539-553

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Keywords: Rational expectations; forecast efficiency; C12; G14;

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References

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  1. Abel, Andrew B. & Mishkin, Frederic S., 1983. "An integrated view of tests of rationality, market efficiency and the short-run neutrality of monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 11(1), pages 3-24.
  2. Mork, Knut Anton, 1987. "Ain't Behavin': Forecast Errors and Measurement Errors in Early GNP Estimates," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 5(2), pages 165-75, April.
  3. Hasan Bakhshi & Anthony Yates, 1998. "Are UK inflation expectations rational?," Bank of England working papers 81, Bank of England.
  4. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  5. Nordhaus, William D, 1987. "Forecasting Efficiency: Concepts and Applications," The Review of Economics and Statistics, MIT Press, vol. 69(4), pages 667-74, November.
  6. Neftci, Salih N. & Theodossiou, Panayiotis, 1991. "Properties and Stochastic nature of BEA's early estimates of GNP," Journal of Economics and Business, Elsevier, Elsevier, vol. 43(3), pages 231-239, August.
  7. Keane, Michael P & Runkle, David E, 1990. "Testing the Rationality of Price Forecasts: New Evidence from Panel Data," American Economic Review, American Economic Association, vol. 80(4), pages 714-35, September.
  8. Whitney K. Newey & Kenneth D. West, 1986. "A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix," NBER Technical Working Papers 0055, National Bureau of Economic Research, Inc.
  9. Batchelor, Roy & Dua, Pami, 1991. "Blue Chip Rationality Tests," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 23(4), pages 692-705, November.
  10. Jeff Dominitz, 1998. "Earnings Expectations, Revisions, And Realizations," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 374-388, August.
  11. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, Econometric Society, vol. 49(6), pages 1417-26, November.
  12. Frederick Joutz & H. O. Stekler, 1998. "Data revisions and forecasting," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 30(8), pages 1011-1016.
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Cited by:
  1. Gaglianone, Wagner Piazza & Pereira, Ana Luiza Louzada, 2005. "Um ensaio sobre expectativas da taxa de câmbio no Brasil
    [An essay on the foreign exchange rate expectations in Brazil]
    ," MPRA Paper 20840, University Library of Munich, Germany.
  2. Michael Berlemann & Forrest Nelson, 2005. "Forecasting Inflation via Experimental Stock Markets Some Results from Pilot Markets," Ifo Working Paper Series Ifo Working Papers No. 10, Ifo Institute for Economic Research at the University of Munich.
  3. Hakan Kara & Hande Kucuk Tuger, 2005. "Some Evidence on the Irrationality of Inflation Expectations in Turkey," Working Papers 0512, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  4. Péter Gábriel & Klára Pintér, 2006. "Whom should we believe? Information content of the yield curve and analysts’ expectations," MNB Bulletin, Magyar Nemzeti Bank (the central bank of Hungary), Magyar Nemzeti Bank (the central bank of Hungary), vol. 1(2), pages 6-13, December.
  5. Capistrán, Carlos & López-Moctezuma, Gabriel, 2014. "Forecast revisions of Mexican inflation and GDP growth," International Journal of Forecasting, Elsevier, Elsevier, vol. 30(2), pages 177-191.
  6. Carlos Capistrán, 2007. "Optimality Tests for Multi-Horizon Forecasts," Working Papers 2007-14, Banco de México.
  7. Wolfgang Nierhaus, 2008. "Wirtschaftskonjunktur 2007: Prognose und Wirklichkeit," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 61(03), pages 21-26, 02.
  8. Carlos Capistrán & Gabriel López-Moctezuma, 2010. "Forecast Revisions of Mexican Inflation and GDP Growth," Working Papers 2010-11, Banco de México.

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