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Rational expectations and fixed-event forecasts: an application to UK inflation

Author

Listed:
  • Hasan Bakhshi
  • George Kapetanios
  • Anthony Yates

Abstract

In this paper a version of the rational expectations hypothesis is tested using fixed-event inflation forecasts for the UK. Fixed-event forecasts consist of a panel of forecasts for a set of outturns of a series at varying horizons prior to each outturn. The forecasts are the prediction of fund managers surveyed by Merrill Lynch. Fixed-event forecasts allow tests for whether expectations are unbiased in a similar fashion to the rest of the literature. But they also permit particular tests of forecast efficiency to be conducted - whether the forecasts make best use of available information - that are not possible with rolling event data. The results show evidence of a positive bias in inflation expectations. Evidence for inefficiency is much less clear cut.

Suggested Citation

  • Hasan Bakhshi & George Kapetanios & Anthony Yates, 2003. "Rational expectations and fixed-event forecasts: an application to UK inflation," Bank of England working papers 176, Bank of England.
    • Handle: RePEc:boe:boeewp:176
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    References listed on IDEAS

    as
    1. Jeff Dominitz, 1998. "Earnings Expectations, Revisions, And Realizations," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 374-388, August.
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    6. Batchelor, Roy & Dua, Pami, 1991. "Blue Chip Rationality Tests," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(4), pages 692-705, November.
    7. Keane, Michael P & Runkle, David E, 1990. "Testing the Rationality of Price Forecasts: New Evidence from Panel Data," American Economic Review, American Economic Association, vol. 80(4), pages 714-735, September.
    8. Hasan Bakhshi & Anthony Yates, 1998. "Are UK inflation expectations rational?," Bank of England working papers 81, Bank of England.
    9. Nordhaus, William D, 1987. "Forecasting Efficiency: Concepts and Applications," The Review of Economics and Statistics, MIT Press, vol. 69(4), pages 667-674, November.
    10. Neftci, Salih N. & Theodossiou, Panayiotis, 1991. "Properties and Stochastic nature of BEA's early estimates of GNP," Journal of Economics and Business, Elsevier, vol. 43(3), pages 231-239, August.
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    Citations

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    Cited by:

    1. Capistrán, Carlos & López-Moctezuma, Gabriel, 2014. "Forecast revisions of Mexican inflation and GDP growth," International Journal of Forecasting, Elsevier, vol. 30(2), pages 177-191.
    2. Pedersen, Michael, 2015. "What affects the predictions of private forecasters? The role of central bank forecasts in Chile," International Journal of Forecasting, Elsevier, vol. 31(4), pages 1043-1055.
    3. repec:ags:jlaare:276505 is not listed on IDEAS
    4. Gaglianone, Wagner Piazza & Pereira, Ana Luiza Louzada, 2005. "Um ensaio sobre expectativas da taxa de câmbio no Brasil
      [An essay on the foreign exchange rate expectations in Brazil]      ," MPRA Paper 20840, University Library of Munich, Germany.
    5. repec:taf:applec:v:50:y:2018:i:42:p:4540-4555 is not listed on IDEAS
    6. Michael Berlemann & Forrest Nelson, 2005. "Forecasting Inflation via Experimental Stock Markets Some Results from Pilot Markets," ifo Working Paper Series 10, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    7. Péter Gábriel & Klára Pintér, 2006. "Whom should we believe? Information content of the yield curve and analysts’ expectations," MNB Bulletin (discontinued), Magyar Nemzeti Bank (Central Bank of Hungary), vol. 1(2), pages 6-13, December.
    8. Wolfgang Nierhaus, 2008. "Wirtschaftskonjunktur 2007: Prognose und Wirklichkeit," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 61(03), pages 21-26, February.
    9. Berlemann, Michael, 2008. "Forecasting the ECB's main refinancing rate. A field experiment," Economics Letters, Elsevier, vol. 99(2), pages 379-383, May.
    10. Carlos Capistrán, 2007. "Optimality Tests for Multi-Horizon Forecasts," Working Papers 2007-14, Banco de México.
    11. Hakan Kara & Hande Kucuk Tuger, 2005. "Some Evidence on the Irrationality of Inflation Expectations in Turkey," Working Papers 0512, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    12. Simón Sosvilla-Rivero & María del Carmen Ramos-Herrera, 2018. "Inflation, real economic growth and unemployment expectations: an empirical analysis based on the ECB survey of professional forecasters," Applied Economics, Taylor & Francis Journals, vol. 50(42), pages 4540-4555, September.

    More about this item

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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