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Some Evidence on the Irrationality of Inflation Expectations in Turkey

  • Hakan Kara
  • Hande Kucuk Tuger

This study aims to add to the understanding of inflation expectations in Turkey. We conduct several tests to understand whether economic agents use all the available information to forecast inflation. The answer is a lucid “NO”: Using 5 different quantitative expectations series from 3 different surveys, we find that all the expectations series, except the one month ahead forecasts, are biased and inefficient. Furthermore, forecast errors in many cases are significantly correlated with exchange rate changes, revealing that agents do not take into account the lagged effects of the exchange rate movements on inflation while forming their expectations. That is, the role of exchange rate pass-through, as a determinant of inflation, is not well understood. These results also suggest that some form of deviation from rational expectations may be necessary—at least during the disinflation period—in modeling inflation dynamics.

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File URL: http://www.tcmb.gov.tr/wps/wcm/connect/9bcbffa9-022e-4762-a635-545d29b989fa/WP0512ENG.pdf?MOD=AJPERES&CACHEID=9bcbffa9-022e-4762-a635-545d29b989fa
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Paper provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its series Working Papers with number 0512.

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Date of creation: 2005
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Handle: RePEc:tcb:wpaper:0512
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  1. Satish Ranchhod, 2003. "The relationship between inflation expectations survey data and inflation," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 66, December.
  2. Ben S. Bernanke & Michael Woodford, 1997. "Inflation Forecasts and Monetary Policy," NBER Working Papers 6157, National Bureau of Economic Research, Inc.
  3. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  4. H. Bakhshi & G. Kapetanios & T. Yates, 2005. "Rational expectations and fixed-event forecasts: An application to UK inflation," Empirical Economics, Springer, vol. 30(3), pages 539-553, October.
  5. Hakan Kara & Hande Kucuk Tuger & Umit Ozlale & Burc Tuger & Devrim Yavuz & Eray M. Yucel, 2005. "Exchange Rate Pass-Through in Turkey : Has it Changed and to What Extent?," Working Papers 0504, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  6. Forsells, Magnus & Kenny, Geoff, 2002. "The rationality of consumers' inflation expectations: survey-based evidence for the euro area," Working Paper Series 0163, European Central Bank.
  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 714-35, September.
  8. Lyziak, Tomasz, 2003. "Consumer inflation expectations in Poland," Working Paper Series 0287, European Central Bank.
  9. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October.
  10. Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 76, pages 678.
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