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Directional analysis of consumers’ forecasts of inflation in a small open economy: evidence from South Korea

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  • Young Bin Ahn
  • Yoichi Tsuchiya

Abstract

We evaluate the directional accuracy of consumers’ forecasts of inflation in predicting the movement of the actual CPI in a small open economy. In order to do so, we use a method developed by Pesaran and Timmermann (2009), based on South Korean data. By illustrating an application of the new market-timing test, we show that consumers’ expectations of inflation are not a useful predictor of the CPI in South Korea. Our findings suggest that the directional accuracy of consumers’ 1-year-ahead forecasts of inflation is not affected by the inflation targeting of the Bank of Korea. Our findings also suggest that consumers’ 1-year-ahead forecasts of inflation are scattered away from the Bank of Korea’s inflation target.

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  • Young Bin Ahn & Yoichi Tsuchiya, 2016. "Directional analysis of consumers’ forecasts of inflation in a small open economy: evidence from South Korea," Applied Economics, Taylor & Francis Journals, vol. 48(10), pages 854-864, February.
    • Handle: RePEc:taf:applec:v:48:y:2016:i:10:p:854-864
    DOI: 10.1080/00036846.2015.1088144
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