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Inflation persistence and the rationality of inflation expectations

Author

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  • Sophocles N. Brissimis

    (University of Piraeus)

  • Petros M. Migiakis

    (Bank of Greece)

Abstract

The rational expectations hypothesis for survey and model-based inflation forecasts ? from the Survey of Professional Forecasters and the Greenbook respectively ? is examined by properly taking into account persistence in the data. The finding of near-unit-root effects in inflation and inflation expectations motivates the use of a local-to-unity specification of the inflation process that enables us to test whether the data are generated by locally non-stationary or stationary processes. Thus, we test, rather than assume, stationarity of near-unit-root processes. In addition, we set out an empirical framework for assessing relationships between locally non-stationary series. In this context, we test the rational expectations hypothesis by allowing the co-existence of a long-run relationship obtained under the rational expectations restrictions with short-run "learning" effects. Our empirical results indicate that the rational expectations hypothesis holds in the long run, while forecasters adjust their expectations slowly in the short run. This finding lends support to the hypothesis that the persistence of inflation comes from the dynamics of expectations.

Suggested Citation

  • Sophocles N. Brissimis & Petros M. Migiakis, 2013. "Inflation persistence and the rationality of inflation expectations," Working Papers 151, Bank of Greece.
  • Handle: RePEc:bog:wpaper:151
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    Cited by:

    1. Dzmitry Kruk, 2016. "SVAR Approach for Extracting Inflation Expectations Given Severe Monetary Shocks: Evidence from Belarus," BEROC Working Paper Series 39, Belarusian Economic Research and Outreach Center (BEROC).
    2. Hiona Balfoussia & Sophocles N. Brissimis & Manthos D. Delis, 2011. "The theoretical framework of monetary policy revisited," Working Papers 138, Bank of Greece.
    3. Alexandros P. Bechlioulis & Sophocles N. Brissimis, 2021. "Are household consumption decisions affected by past due unsecured debt? Theory and evidence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 3040-3053, April.
    4. Geronikolaou, George & Spyromitros, Eleftherios & Tsintzos, Panagiotis, 2020. "Progressive taxation and human capital as determinants of inflation persistence," Economic Modelling, Elsevier, vol. 88(C), pages 82-97.

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    More about this item

    Keywords

    Inflation; rational expectations; high persistence;
    All these keywords.

    JEL classification:

    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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