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On the Accuracy of the Probability Method for Quantifying Beliefs about Inflation

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Author Info
Thomas Maag () (KOF Swiss Economic Institute, ETH Zurich, Switzerland)

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Abstract

This paper assesses the probability method for quantifying EU consumer survey data on perceived and expected inflation. Based on micro-data from the Swedish consumer survey that asks for both qualitative and quantitative responses, I find that the theoretical assumptions of the method do not hold. In particular, estimated models of response behavior indicate that qualitative inflation expectations are not ordered. Nevertheless, the probability method generates series that are highly correlated with the mean of actual quantitative beliefs. For quantifying the cross-sectional dispersion of beliefs, however, an index of qualitative variation outperforms the probability method.

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Publisher Info
Paper provided by KOF Swiss Economic Institute, ETH Zurich in its series KOF Working papers with number 09-230.

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Length: 51 pages
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:kof:wpskof:09-230

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Related research
Keywords: quantification; inflation expectations; inflation perceptions; qualitative response data; belief formation;

Find related papers by JEL classification:
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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  1. Dasgupta, Susmita & Lahiri, Kajal, 1992. "A Comparative Study of Alternative Methods of Quantifying Qualitative Survey Responses Using NAPM Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(4), pages 391-400, October.
  2. Jonung, Lars & Laidler, David E, 1988. "Are Perceptions of Inflation Rational? Some Evidence for Sweden," American Economic Review, American Economic Association, vol. 78(5), pages 1080-87, December. [Downloadable!] (restricted)
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  3. Berk, Jan Marc, 1999. "Measuring Inflation Expectations: A Survey Data Approach," Applied Economics, Taylor and Francis Journals, vol. 31(11), pages 1467-80, November. [Downloadable!] (restricted)
  4. Michela Nardo, 2003. "The Quantification of Qualitative Survey Data: A Critical Assessment," Journal of Economic Surveys, Blackwell Publishing, vol. 17(5), pages 645-668, December. [Downloadable!] (restricted)
  5. Defris, L. V. & Williams, R. A., 1979. "Quantitative versus qualitative measures of price expectations: The evidence from Australian consumer surveys," Economics Letters, Elsevier, vol. 2(2), pages 169-173. [Downloadable!] (restricted)
  6. Batchelor, R A & Dua, P, 1987. "The Accuracy and Rationality of UK Inflation Expectations: Some Quantitative Evidence," Applied Economics, Taylor and Francis Journals, vol. 19(6), pages 819-28, June.
  7. Lahiri, Kajal & Teigland, Christie, 1987. "On the normality of probability distributions of inflation and GNP forecasts," International Journal of Forecasting, Elsevier, vol. 3(2), pages 269-279. [Downloadable!] (restricted)
  8. McAleer, M. & Smith, J., 1990. "Alternative Procedures for Converting Qualitative Response Data to Quantitative Expectations: An Application to Australian Manufacturing," Papers 219, Australian National University - Department of Economics.
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  9. Batchelor, Roy A & Orr, Adrian B, 1988. "Inflation Expectations Revisited," Economica, London School of Economics and Political Science, vol. 55(219), pages 317-31, August. [Downloadable!] (restricted)
  10. Giovanni Mastrobuoni & Wioletta Dziuda, 2005. "The Euro Changeover and its Effects on Price Transparency and Inflation," Carlo Alberto Notebooks 26, Collegio Carlo Alberto, revised 2006. [Downloadable!]
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  11. Manfred Fluch & Helmut Stix, 2007. "The Development of Euro Prices – Subjective Perception and Empirical Facts," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 55-84, April 200. [Downloadable!]
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