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The case for higher frequency inflation expectations

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  • Guzman, Giselle C.

Abstract

I present evidence that higher frequency measures of inflation expectations outperform lower frequency measures of inflation expectations in tests of accuracy, predictive power, and rationality. For decades, the academic literature has focused on three survey measures of expected inflation: the Livingston Survey, the Survey of Professional Forecasters, and the Michigan Surveys of Consumers. While these measures have been useful in developing models of forecasting inflation, the data are low frequency measures that are anachronistic in the modern era of high frequency and real-time data. I present a collection of 37 different measures of inflation expectations, including many previously unexploited monthly and real-time measures of inflation expectations. These higher frequency measures tend to outperform the standard three low frequency survey measures in tests of accuracy, predictive power, and rationality, indicating that there are benefits to using higher frequency measures of inflation expectations. Out of sample forecasts confirm the findings.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 36656.

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Date of creation: 29 Jun 2011
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Handle: RePEc:pra:mprapa:36656

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Keywords: inflation; expectations; sentiment; TIPS; surveys; forecasting; Michigan; SPF; Livingston; time-series; econometrics; inflation; predictive power; out-of-sample forecasts; high frequency; Rational Expectations Hypothesis; Efficient Markets Hypothesis; hypothesis testing; inflation forecasting;

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  1. Giannone, Domenico & Reichlin, Lucrezia & Small, David, 2008. "Nowcasting: The real-time informational content of macroeconomic data," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 665-676, May.
  2. repec:pra:mprapa:36512 is not listed on IDEAS
  3. Joseph E. Stiglitz, 2011. "Rethinking Macroeconomics: What Failed, And How To Repair It," Journal of the European Economic Association, European Economic Association, vol. 9(4), pages 591-645, 08.
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  11. James H. Stock & Mark W. Watson, 1999. "Forecasting Inflation," NBER Working Papers 7023, National Bureau of Economic Research, Inc.
  12. Guzman, Giselle C., 2008. "Using sentiment surveys to predict GDP growth and stock returns," MPRA Paper 36653, University Library of Munich, Germany.
  13. Grant, Alan P. & Thomas, Lloyd B., 1999. "Inflationary expectations and rationality revisited," Economics Letters, Elsevier, vol. 62(3), pages 331-338, March.
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