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Evaluating inflation forecasts

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Dean Croushore

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Abstract

In the early 1980s, economists tested inflation forecasts and found that the forecasts were very bad. Either the surveys didn't capture forecasters' expectations, or forecasters didn't have rational expectations. However, the sample period being examined consisted mostly of data from the volatile 1970s, when forecasting was extremely difficult. The question is: If we run the same types of tests that were performed 15 years ago on an updated sample, will we find the same problems with the forecasts? This paper finds that much of the empirical work from 15 years ago does not stand the test of time. The forecast errors from the surveys aren't nearly as bad today as they were in the 1970s. However, some problems remain in the forecasts. It appears to be possible to improve inflation forecasts over some sample periods using bias regressions, and the forecasts don't pass all tests for optimality.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 98-14.

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Date of creation: 1998
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Handle: RePEc:fip:fedpwp:98-14

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Keywords: Forecasting ; Inflation (Finance);

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References listed on IDEAS
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. 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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  2. Francis X. Diebold & Jose A. Lopez, 1996. "Forecast Evaluation and Combination," NBER Technical Working Papers 0192, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Michael F. Bryan & Stephen G. Cecchetti, 1994. "Measuring Core Inflation," NBER Chapters, in: Monetary Policy, pages 195-219 National Bureau of Economic Research, Inc. [Downloadable!]
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  4. Brown, Bryan W & Maital, Shlomo, 1981. "What Do Economists Know? An Empirical Study of Experts' Expectations," Econometrica, Econometric Society, vol. 49(2), pages 491-504, March. [Downloadable!] (restricted)
  5. Dean Croushore, 1993. "Introducing: the survey of professional forecasters," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 3-15. [Downloadable!]
  6. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October. [Downloadable!] (restricted)
  7. Herb Taylor, 1992. "The Livingston Surveys: a history of hopes and fears," Business Review, Federal Reserve Bank of Philadelphia, issue Jan, pages 15-27. [Downloadable!]
  8. John A. Carlson, 1977. "A Study of Price Forecasts," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 6, number 1, pages 33-63 National Bureau of Economic Research, Inc. [Downloadable!]
  9. repec:fip:fedreq:y:1987:i:nov:p:3-9:n:v.73no.6 is not listed on IDEAS
  10. Dean Croushore, 1997. "The Livingston Survey: still useful after all these years," Business Review, Federal Reserve Bank of Philadelphia, issue Mar, pages 15-27. [Downloadable!]
  11. Bryan, Michael F & Gavin, William T, 1986. "Models of Inflation Expectations Formation: A Comparison of Household and Economist Forecasts: A Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(4), pages 539-44, 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. Laurence Ball & Dean Croushore, 1998. "Expectations and the effects of monetary policy," Working Papers 98-13, Federal Reserve Bank of Philadelphia. [Downloadable!]
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  2. Lance J. Bachmeier & Norman R. Swanson, 2003. "Predicting Inflation: Does The Quantity Theory Help?," Departmental Working Papers 200317, Rutgers University, Department of Economics. [Downloadable!]
    Other versions:
  3. Nicholas S. Souleles, 2001. "Consumer Sentiment: Its Rationality and Usefulness in Forecasting Expenditure - Evidence from the Michigan Micro Data," NBER Working Papers 8410, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Michael T. Kiley, 2008. "Monetary policy actions and long-run inflation expectations," Finance and Economics Discussion Series 2008-03, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  5. Dean Croushore, 2006. "An evaluation of inflation forecasts from surveys using real-time data," Working Papers 06-19, Federal Reserve Bank of Philadelphia. [Downloadable!]
  6. Arabinda Basistha & Richard Startz, 2004. "Why were changes in the federal funds rate smaller in the 1990s?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(3), pages 339-354. [Downloadable!]
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  7. Karlyn Mitchell & Douglas K. Pearce, 2004. "Professional Forecasts of Interest Rates and Exchange Rates: Evidence from the Wall Street Journal's Panel of Economists," Working Paper Series 004, North Carolina State University, Department of Economics. [Downloadable!]
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  8. Carlos Capistrán & Allan Timmermann, 2008. "Disagreement and Biases in Inflation Expectations," CREATES Research Papers 2008-56, School of Economics and Management, University of Aarhus. [Downloadable!]
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  9. Jordi Pons-Novell, 2003. "Strategic bias, herding behaviour and economic forecasts," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 22(1), pages 67-77. [Downloadable!]
  10. Emiliano Santoro & Damjan Pfajfar, 2006. "Heterogeneity and learning in inflation expectation formation: an empirical assessment," Department of Economics Working Papers 0607, Department of Economics, University of Trento, Italia. [Downloadable!]
  11. Andrew Ang & Geert Bekaert & Min Wei, 2006. "Do macro variables, asset markets, or surveys forecast inflation better?," Finance and Economics Discussion Series 2006-15, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  12. Glenn D. Rudebusch, 2000. "Assessing nominal income rules for monetary policy with model and data uncertainty," Working Paper Series 14, European Central Bank. [Downloadable!]
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  13. Dean Croushore & Tom Stark, 2002. "Forecasting coin demand," Working Papers 02-15, Federal Reserve Bank of Philadelphia. [Downloadable!]
  14. Fabio Milani, 2005. "Learning, Monetary Policy Rules, and Macroeconomic Stability," Macroeconomics 0508019, EconWPA. [Downloadable!]
    Other versions:
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