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Measuring disagreement in UK consumer and central bank inflation forecasts

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  • Richhild Moessner
  • Feng Zhu
  • Colin Ellis
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Abstract

We provide a new perspective on disagreement in inflation expectations by examining the full probability distributions of UK consumer inflation forecasts based on an adaptive bootstrap multimodality test. Furthermore, we compare the inflation forecasts of the Bank of England's Monetary Policy Committee (MPC) with those of UK consumers, for which we use data from the 2001-2007 February GfK NOP consumer surveys. Our analysis indicates substantial disagreement among UK consumers, and between the MPC and consumers, concerning one-year- ahead inflation forecasts. Such disagreement persisted throughout the sample, with no signs of convergence, consistent with consumers' inflation expectations not being "well-anchored" in the sense of matching the central bank's expectations. UK consumers had far more diverse views about future inflation than the MPC. It is possible that the MPC enjoyed certain information advantages which allowed it to have a narrower range of inflation forecasts.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 339.

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Length: 49 pages
Date of creation: Feb 2011
Date of revision:
Handle: RePEc:bis:biswps:339

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Related research

Keywords: Adaptive kernel method; adaptive multimodality test; consumer survey; inflation forecasts; nonparametric density estimation;

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References

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  1. N. Gregory Mankiw & Ricardo Reis & Justin Wolfers, 2003. "Disagreement about Inflation Expectations," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 2011, Harvard - Institute of Economic Research.
  2. Francis X. Diebold & Anthony S. Tay & Kenneth F. Wallis, 1997. "Evaluating Density Forecasts of Inflation: The Survey of Professional Forecasters," NBER Working Papers 6228, National Bureau of Economic Research, Inc.
  3. Ang, Andrew & Bekaert, Geert & Wei, Min, 2007. "Do macro variables, asset markets, or surveys forecast inflation better?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(4), pages 1163-1212, May.
  4. Boero,Gianna & Smith,Jeremy & Wallis,Kenneth F, 2006. "Uncertainty and disagreement in economic prediction : the Bank of England Survey of External Forecasters," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 811, University of Warwick, Department of Economics.
  5. Sylvain Leduc & Keith Sill & Tom Stark, 2002. "Self-fulfilling expectations and the inflation of the 1970s: evidence from the Livingston Survey," Working Papers 02-13, Federal Reserve Bank of Philadelphia.
  6. Lahiri, Kajal & Teigland, Christie, 1987. "On the normality of probability distributions of inflation and GNP forecasts," International Journal of Forecasting, Elsevier, Elsevier, vol. 3(2), pages 269-279.
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Cited by:
  1. Gabriele Galati & Peter Heemeijer & Richhild Moessner, 2011. "How do inflation expectations form? New insights from a high-frequency survey," DNB Working Papers, Netherlands Central Bank, Research Department 283, Netherlands Central Bank, Research Department.

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