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On the accuracy of the probability method for quantifying beliefs about inflation

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  • Thomas Maag

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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  • Thomas Maag, 2009. "On the accuracy of the probability method for quantifying beliefs about inflation," KOF Working papers 09-230, KOF Swiss Economic Institute, ETH Zurich.
    • Handle: RePEc:kof:wpskof:09-230
    DOI: 10.3929/ethz-a-005859391
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    References listed on IDEAS

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    9. Sarah M. Lein & Thomas Maag, 2011. "The Formation Of Inflation Perceptions: Some Empirical Facts For European Countries," Scottish Journal of Political Economy, Scottish Economic Society, vol. 58(2), pages 155-188, May.
    10. Steffen Henzel & Timo Wollmershäuser, 2006. "Quantifying Inflation Expectations with the Carlson-Parkin Method: A Survey-based Determination of the Just Noticeable Difference," Journal of Business Cycle Measurement and Analysis, OECD Publishing, Centre for International Research on Economic Tendency Surveys, vol. 2005(3), pages 321-352.
    11. Luc Aucremanne & Marianne Collin & Thomas Stragier, 2007. "Assessing the Gap between Observed and Perceived Inflation in the Euro Area : Is the Credibility of the HICP at Stake ?," Working Paper Research 112, National Bank of Belgium.
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    14. 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.
    15. Michela Nardo, 2003. "The Quantification of Qualitative Survey Data: A Critical Assessment," Journal of Economic Surveys, Wiley Blackwell, vol. 17(5), pages 645-668, December.
    16. 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.
    17. Batchelor, Roy A & Orr, Adrian B, 1988. "Inflation Expectations Revisited," Economica, London School of Economics and Political Science, vol. 55(219), pages 317-331, August.
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    Cited by:

    1. Lena Draeger & Michael J. Lamla, 2015. "Disagreement à la Taylor: Evidence from Survey Microdata," KOF Working papers 15-380, KOF Swiss Economic Institute, ETH Zurich.
    2. Juan Camilo Anzoátegui-Zapata & Juan Camilo Galvis-Ciro, 2020. "Disagreements in Consumer Inflation Expectations: Empirical Evidence for a Latin American Economy," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 16(2), pages 99-122, November.
    3. Siklos, Pierre, 2017. "What Has Publishing Inflation Forecasts Accomplished? Central Banks And Their Competitors," LCERPA Working Papers 0098, Laurier Centre for Economic Research and Policy Analysis, revised 01 Apr 2017.
    4. Oscar Claveria & Enric Monte & Salvador Torra, 2017. "Let the data do the talking: Empirical modelling of survey-based expectations by means of genetic programming," IREA Working Papers 201711, University of Barcelona, Research Institute of Applied Economics, revised May 2017.
    5. Maurizio Bovi, 2016. "The tale of two expectations," Quality & Quantity: International Journal of Methodology, Springer, vol. 50(6), pages 2677-2705, November.
    6. Michael J. Lamla & Thomas Maag, 2012. "The Role of Media for Inflation Forecast Disagreement of Households and Professional Forecasters," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(7), pages 1325-1350, October.
    7. Oscar Claveria & Enric Monte & Salvador Torra, 2019. "Empirical modelling of survey-based expectations for the design of economic indicators in five European regions," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 46(2), pages 205-227, May.
    8. Bovi, Maurizio, 2013. "Are the representative agent’s beliefs based on efficient econometric models?," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 633-648.
    9. Breitung, Jörg & Schmeling, Maik, 2013. "Quantifying survey expectations: What’s wrong with the probability approach?," International Journal of Forecasting, Elsevier, vol. 29(1), pages 142-154.
    10. Oscar Claveria & Enric Monte & Salvador Torra, 2017. "A new approach for the quantification of qualitative measures of economic expectations," Quality & Quantity: International Journal of Methodology, Springer, vol. 51(6), pages 2685-2706, November.
    11. Lena Dr䧥r & Jan-Oliver Menz & Ulrich Fritsche, 2014. "Perceived inflation under loss aversion," Applied Economics, Taylor & Francis Journals, vol. 46(3), pages 282-293, January.
    12. Maurizio Bovi, 2014. "Shocks and the Expectations Formation Process. A Tale of Two Expectations," Natural Field Experiments 00390, The Field Experiments Website.
    13. Kajal Lahiri & Yongchen Zhao, 2013. "Quantifying Heterogeneous Survey Expectations: The Carlson-Parkin Method Revisited," Discussion Papers 13-08, University at Albany, SUNY, Department of Economics.

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    Keywords

    Quantification; Inflation expectations; Inflation perceptions; Qualitative response data; Belief formation;
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