The formation of inflation expectations under changing inflation regimes

Arbeitspapier

The present paper offers a careful description of empirical identification of possible multiple changes in regime. We apply recently developed tools designed to select between regime-switching models among a broad class of linear and nonlinear regression models and provide a discussion of the impact on the formation of inflation expectations in the presence of multiple and recurrent changes in inflation regimes. Our empirical findings give a plausible explanation as to why the rationalexpectation hypothesis based on direct measures of inflation expectations from survey series is typically rejected due to large systematic differences between actual and expected inflation rates. In particular, our results indicate that in the case of changing and not perfectly observed inflation regimes, inference about rationality and unbiasedness based on a comparison of ex-ante forecasts from survey series and actual inflation rate based on ex-post realizations will be ambiguous because of the presence of an ex-post bias. The empirical findings are based on Danish inflation rates covering 1957 - 1998. We show that it is not possible to reject the hypothesis of multiple inflationary regimes and that the actual inflation rate can be represented by a two state Markov regime-switching model. It turns out that the real-time forecasts produced from this model exhibit a large degree of similarity when compared to the direct measures of inflation expectations. The result illustrates the important impact of switching regimes on the formation of actual and expected inflation and hence of ex-post bias as a main contributor to the difference between actual and expected inflation observed directly from survey series.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: Danmarks Nationalbank Working Papers ; No. 4

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Semiparametric and Nonparametric Methods: General ; Single Equation Models; Single Variables: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes ; Classification Discontinued 2008. See C83. ; Model Construction and Estimation ; Model Evaluation, Validation, and Selection ; Forecasting Models; Simulation Methods
• Thema: Markov regime-switching ; Ex-post bias ; Inflation and inflation expectations ; Inflationserwartung ; Inflationstheorie ; Markovscher Prozess ; Theorie

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Dahl, Christian M. ; Hansen, Niels L.
• Ereignis: Veröffentlichung
• (wer): Danmarks Nationalbank
• (wo): Copenhagen
• (wann): 2002

Weitere Informationen

• Handle: http://hdl.handle.net/10419/82333
• Letzte Aktualisierung: 10.03.2025, 11:41 MEZ