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

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Hasan Bakhshi
George Kapetanios
Anthony Yates

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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.

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Paper provided by Bank of England in its series Bank of England working papers with number 176.

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Handle: RePEc:boe:boeewp:176

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  1. Hasan Bakhshi & Anthony Yates, . "Are UK inflation expectations rational?," Bank of England working papers 81, Bank of England. [Downloadable!]
  2. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May. [Downloadable!] (restricted)
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  3. 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, Blackwell Publishing, vol. 58(2), pages 277-97, April. [Downloadable!] (restricted)
  4. Neftci, Salih N. & Theodossiou, Panayiotis, 1991. "Properties and Stochastic nature of BEA's early estimates of GNP," Journal of Economics and Business, Elsevier, vol. 43(3), pages 231-239, August. [Downloadable!] (restricted)
  5. Jeff Dominitz, 1998. "Earnings Expectations, Revisions, And Realizations," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 374-388, August. [Downloadable!] (restricted)
  6. Batchelor, Roy & Dua, Pami, 1991. "Blue Chip Rationality Tests," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(4), pages 692-705, November. [Downloadable!] (restricted)
  7. Mork, Knut Anton, 1987. "Ain't Behavin': Forecast Errors and Measurement Errors in Early GNP Estimates," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(2), pages 165-75, April.
  8. Joutz, Frederick L & Stekler, H O, 1998. "Data Revisions and Forecasting," Applied Economics, Taylor and Francis Journals, vol. 30(8), pages 1011-16, August. [Downloadable!] (restricted)
  9. 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. [Downloadable!] (restricted)
  10. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November. [Downloadable!] (restricted)
  11. 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, vol. 11(1), pages 3-24. [Downloadable!] (restricted)
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  12. Nordhaus, William D, 1987. "Forecasting Efficiency: Concepts and Applications," The Review of Economics and Statistics, MIT Press, vol. 69(4), pages 667-74, November. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!]
  2. 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), vol. 1(2), pages 6-13, December. [Downloadable!]
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