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Do Inflation Expectations Granger Cause Inflation?

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  • Stockhammar, Pär

    () (National Institute of Economic Research)

  • Österholm, Pär

    () (Örebro University, School of Business)

Abstract

In this paper, we investigate whether survey measures of inflation expectations in Sweden Granger cause Swedish CPI-inflation. This is done by studying the precision of out-of-sample forecasts from Bayesian VAR models using a sample of quarterly data from 1996 to 2016. It is found that the inclusion of inflation expectations in the models tends to improve forecast precision. However, the improvement is typically small enough that it could be described as economically irrelevant. One exception can possibly be found in the expectations of businesses in the National Institute of Economic Research’s Economic Tendency Survey; when included in the models, these improve forecast precision in a meaningful way at short horizons. Taken together, it seems that the inflation expectations studied here do not provide a silver bullet for those who try to improve VAR-based forecasts of Swedish inflation. The largest benefits from using these survey expectations may instead perhaps be found among analysts and policy makers; they can after all provide relevant information concerning, for example, the credibility of the inflation target or challenges that the central bank might face when conducting monetary policy.

Suggested Citation

  • Stockhammar, Pär & Österholm, Pär, 2016. "Do Inflation Expectations Granger Cause Inflation?," Working Papers 145, National Institute of Economic Research.
  • Handle: RePEc:hhs:nierwp:0145
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    References listed on IDEAS

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    Cited by:

    1. Mossfeldt, Marcus & Stockhammar, Pär, 2016. "Forecasting Goods and Services Inflation in Sweden," Working Papers 146, National Institute of Economic Research.

    More about this item

    Keywords

    Bayesian VAR; Granger causality; Out-of-sample forecasts;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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