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Interest rate movements and US consumers’ inflation forecast errors: is there a link?

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  • Hamid Baghestani

    (American University of Sharjah)

Abstract

The Fisher effect maintains that movements in short-term interest rates largely reflect changes in expected inflation. Since expected inflation is subject to error, we ask whether interest rates move in response to over- and under-predictions of inflation. In answering, we measure expected inflation by the consumers’ forecast of inflation derived from the Michigan Surveys of Consumers (MSC). Our findings for 1978–2013 indicate that the MSC inflation forecasts were unbiased, efficient, and directionally accurate. For 1978–2007, (i) interest rates moved downward (upward) in response to MSC over-predictions (under-predictions) of inflation, and (ii) MSC inflation forecast errors had directional predictability for interest rates. However, no link between interest rate movements and MSC inflation forecast errors is detected for 2008–2013 when monetary policy kept short-term interest rates unusually low.

Suggested Citation

  • Hamid Baghestani, 2016. "Interest rate movements and US consumers’ inflation forecast errors: is there a link?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 40(3), pages 623-630, July.
    • Handle: RePEc:spr:jecfin:v:40:y:2016:i:3:d:10.1007_s12197-016-9354-x
    DOI: 10.1007/s12197-016-9354-x
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    References listed on IDEAS

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    1. 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 281-293, April.
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    3. Mishkin, Frederic S., 1992. "Is the Fisher effect for real? : A reexamination of the relationship between inflation and interest rates," Journal of Monetary Economics, Elsevier, vol. 30(2), pages 195-215, November.
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    7. Tara Sinclair & H. O. Stekler & L. Kitzinger, 2010. "Directional forecasts of GDP and inflation: a joint evaluation with an application to Federal Reserve predictions," Applied Economics, Taylor & Francis Journals, vol. 42(18), pages 2289-2297.
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    Cited by:

    1. Hamid Baghestani & Ajalavat Viriyavipart, 2019. "Do factors influencing consumer home-buying attitudes explain output growth?," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 46(5), pages 1104-1115, August.
    2. Hamid Baghestani, 2022. "Mortgage rate predictability and consumer home-buying assessments," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 46(3), pages 593-603, July.
    3. Sheng-Wen Liu & Ying-Chieh Yang & Ralph Norcio, 2017. "Explore the Buffering Effects of Perceived Hidden Inflation on Survival of Mobile Phone Service Providers in Taiwan," Sustainability, MDPI, vol. 9(4), pages 1-12, April.

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    More about this item

    Keywords

    Expected inflation; Fisher effect; Michigan surveys of consumers; Directional predictability; Forecast evaluation;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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