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How well do U.S. consumers predict the direction of change in interest rates?

  • Baghestani, Hamid
  • Kherfi, Samer
Registered author(s):

    The Michigan survey asks U.S. consumers about their 1-year expected directional change in interest rates. For 1978-1983 when interest rates are volatile, we find a strong association between the actual and predicted changes, with no asymmetry (the proportions of incorrectly predicted upward and downward moves are statistically the same.) For 1984-2005 when interest rates are relatively stable, we find asymmetry (consumers do not accurately predict the downward moves in interest rates.) We conclude that consumer borrowing based on such expectations can undermine monetary policy effectiveness, depending both on the directional change in policy and interest rate volatility.

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    File URL: http://www.sciencedirect.com/science/article/B6W5X-4P7789M-1/2/1bb7db2c83c518803cba16ce8c4ca8d7
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    Article provided by Elsevier in its journal The Quarterly Review of Economics and Finance.

    Volume (Year): 48 (2008)
    Issue (Month): 4 (November)
    Pages: 725-732

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    Handle: RePEc:eee:quaeco:v:48:y:2008:i:4:p:725-732
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620167

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    1. Carlson, John A & Parkin, J Michael, 1975. "Inflation Expectations," Economica, London School of Economics and Political Science, vol. 42(166), pages 123-38, May.
    2. Feige, Edgar L & Pearce, Douglas K, 1976. "Economically Rational Expectations: Are Innovations in the Rate of Inflation Independent of Innovations in Measures of Monetary and Fiscal Policy?," Journal of Political Economy, University of Chicago Press, vol. 84(3), pages 499-522, June.
    3. Mark Greer, 2005. "Combination forecasting for directional accuracy: An application to survey interest rate forecasts," Journal of Applied Statistics, Taylor & Francis Journals, vol. 32(6), pages 607-615.
    4. Joutz, Fred & Stekler, H. O., 2000. "An evaluation of the predictions of the Federal Reserve," International Journal of Forecasting, Elsevier, vol. 16(1), pages 17-38.
    5. Crettez, Bertrand & Michel, Philippe, 1992. "Economically rational expectations equilibrium," Economics Letters, Elsevier, vol. 40(2), pages 203-206, October.
    6. Batchelor, Roy & Dua, Pami, 1992. "Survey Expectations in the Time Series Consumption Function," The Review of Economics and Statistics, MIT Press, vol. 74(4), pages 598-606, November.
    7. Peter M. Summers, 2005. "What caused the Great Moderation? : some cross-country evidence," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 5-32.
    8. Greer, Mark, 2003. "Directional accuracy tests of long-term interest rate forecasts," International Journal of Forecasting, Elsevier, vol. 19(2), pages 291-298.
    9. Henriksson, Roy D & Merton, Robert C, 1981. "On Market Timing and Investment Performance. II. Statistical Procedures for Evaluating Forecasting Skills," The Journal of Business, University of Chicago Press, vol. 54(4), pages 513-33, October.
    10. Baghestani, Hamid, 1992. "On the Formation of Expected Inflation under Various Conditions: Some Survey Evidence," The Journal of Business, University of Chicago Press, vol. 65(2), pages 281-93, April.
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