CONSUMERS’ APPROACH TO THE CREDIBILITY OF THE INFLATION FORECASTS PUBLISHED BY CENTRAL BANKS: A NEW METHODOLOGICAL SOLUTION
Abstract
Modern monetary policy focuses on credibility and shaping inflation expectations. In keeping with the concept of inflation forecast targeting, the inflation forecasts published by central banks play a crucial role in the instrument rate decision-making process and may be treated as a specific intermediate target. This study proposes an inflation forecast credibility index, the scope of which is narrowed to non-specialists’ approach to inflation forecasts. The credibility of the forecast is defined as the ability to shape consumers’ inflation expectations. This ability is measured as the absolute difference between the central paths of inflation forecasts (the mode values) in the one-year forecast horizon and one-year consumers’ inflation expectations. The inflation forecast is represented in the study as a function of forecast attributes (accuracy, similarity, and deviation from the inflation target). The credibility function of the forecast is derived from belief function theory, normally distributed, and determined by the linear function of the chosen forecast attributes. The importance of these attributes depends on whether monetary policy was conducted before or after reaching the zero lower bound on the policy rate. The credibility index is calculated for the inflation forecasts published by the central banks of the United Kingdom and Sweden. The main conclusion of the study is that the deviations of the forecast in the last year of the forecast horizon and similarity between consecutive forecasts are important forecast attributes for shaping the inflation expectations of consumers before and after reaching the zero lower bound on the policy rate, and may determine the inflation forecast’s credibility. However, the similarity to consecutive forecasts affects the forecast’s credibility in opposite ways before and after reaching the zero lower bound on the policy rate.
Citations
-
2
CrossRef
-
0
Web of Science
-
2
Scopus
Author (1)
Cite as
Full text
- Publication version
- Accepted or Published Version
- License
- open in new tab
Keywords
Details
- Category:
- Articles
- Type:
- artykuł w czasopiśmie wyróżnionym w JCR
- Published in:
-
JOURNAL OF MACROECONOMICS
no. 62,
pages 1 - 41,
ISSN: 0164-0704 - Language:
- English
- Publication year:
- 2019
- Bibliographic description:
- Tura-Gawron K.: CONSUMERS’ APPROACH TO THE CREDIBILITY OF THE INFLATION FORECASTS PUBLISHED BY CENTRAL BANKS: A NEW METHODOLOGICAL SOLUTION// JOURNAL OF MACROECONOMICS. -Vol. 62, (2019), s.1-41
- DOI:
- Digital Object Identifier (open in new tab) 10.1016/j.jmacro.2019.02.001
- Bibliography: test
-
- Dempster, A, (2001). Normal belief functions and the Kalman filter, in: Data Analysis from Statistical Foundations, A. K. M. E. Saleh. Ed.: Nova Science Publishers, 65-84.
- Dovern, J., Fritsche, U. & Slacalek, J. (2012). Disagreement among Forecasters in G7 Countries. Review of Economics and Statistics. 94(4), 1081-1096. open in new tab
- https://doi.org/10.1162/rest_a_00207 open in new tab
- Dowd, K. (2004). The Swedish Inflation Fan Charts: An evaluation of the Riksbank's Inflation Density Forecasts. Working Paper Nottingham University Business School. January. Dowd, K. (2007). Too good to be true? The (in) credibility of the UK inflation fan charts. Journal of Macroeconomics. 29(1), 91-102. https://doi.org/10.1016/j.jmacro.2005.04.003. Dräger, L. (2015). Inflation perceptions and expectations in Sweden -are media reports the missing link? Oxford Bulletin of Economic and Statistics. 77(5), 681-700. https://doi.org/10.1111/obes.12078. open in new tab
- Edelman, S. & Intrator, N. (2002). Models in Perceptual learning. In: Perceptual learning. Fahle, M. & Poggio, T. ed.: The MIT Press, 337-353. open in new tab
- Ehrmann, M. , Pfajfar, D. & and Santoro, E. (2015). Consumers' Attitudes and Their Inflation Expectations. Finance and Economics Discussion Series 2015-015. Washington: Board of Governors of the Federal Reserve System. https://doi.org/10.17016/FEDS.2015.015. Einhorn, H. (1986). Accepting Error to make Less Error. Journal of Personality Assesment. 50(3), 387-395. https://doi.org/10.1207/s15327752jpa5003_8 open in new tab
- Eysenck, M. & Keane, M. (2003). Cognitive Psychology: A Student's Handbook (4 th ed.). open in new tab
- Hove. Philadelphia. New York: Taylor & Francis.
- Evans, G. & Honkapohja, S. (2001). Learning and Expectations in Macroeconomics. Princeton University Press. Princeton. NJ. Gardner-Medwin, A. & Barlow, H. (2001). The limits of counting accuracy in distributed neural representations. Neural Computation. 13(3), 477-504.
- https://doi.org/10.1162/089976601300014420. open in new tab
- Geberding, Ch. (2001). The information content of survey data on expected price development for monetary policy. Deutsche Bundesbank Discussion Paper, 9. Glimcher, P. (2011). Understanding dopamine and reinforcement learning: The dopamine reward prediction error hypothesis. Proceedings of the National Academy of Sciences. 108(3), 15647-15654. https://doi.org/10.1073/pnas.1014269108. open in new tab
- Grundberg, E. & Modigliani, F. (1954). The Predictability of the Social Events. Journal of Political Economy. 62(6), 465-478. https://doi.org/10.1086/257604. Hommes, C., Sonnemans, J., Tuinstra, J., & van de Velden, H. (2005). Coordination of expectations in asset pricing experiments. Review of Financial Studies. 18(3), 955-980. https://doi.org/0.1093/rfs/hhi003. open in new tab
- Hommes, C. (2011). The heterogeneous expectations hypothesis: Some evidence from the lab. Journal of Economic Dynamics and Control. 35(1), 1-24. open in new tab
- https://doi.org/10.1016/j.jedc.2010.10.003. open in new tab
- Hubert, P. (2014). FOMC Forecasts as a Focal Point for Private Expectations. Journal of Money, Credit and Banking. 46 (7), 1381-1420. https://doi.org/10.1111/jmcb. open in new tab
- Hubert, P. (2015a). Do Central Bank Forecasts Influence Private Agents Forecasting Performance vs. Signals? Journal of Money, Credit and Banking. 47 (4), 771-789. https://doi.org/10.1111/jmcb.12227. open in new tab
- Hubert, P. (2015b). The Influence and Policy Signalling Role of FOMC Forecasts. Oxford Bulletin of Economic and Statistics. 75 (5), 655-680. https://doi.org/10.1111/obes.12093. Kahneman, D. & Tversky, A. (1979). Prospect Theory: An Analysis of Decision Under Risk. Econometrica. 47 (2), 263-292. https://doi.org/10.2307/1914185 . Kahneman, D & Shane, F. (2001). Representativeness revisited: Attribute substitution in intuitive judgment. In: Heuristics and Biases. Gilovich, T., Griffin, D. & Kahneman, D. (ed.), 49-81. https://doi.org/10.1017/cbo9780511808098.004 open in new tab
- Khan, H. & Zhu, Z. (2002). Estimates of the sticky-information Phillips curve for the United States. Canada, and the United Kingdom. Bank of Canada Working Paper 2002-19.
- Knüppel, M. & Schultefrankenfeld, G. (2008). How informative are macroeconomic risk forecasts? An examination of the Bank of England's inflation forecasts. Discussion Paper Series 1. Economic Studies No 14/2008. Deutsche Bundesbank. open in new tab
- Li, M. & Vitanyi, P. (1997). An Introduction to Kołmogorov Complexity and its Applications. Springer Verlag. https://doi.org/10.1007/978-1-4757-2606-0 open in new tab
- Liu, L. (1996). A theory of Gaussian belief functions. International Journal of Approximate Reasoning. 14(2-3), 95-126. https://doi.org/10.1016/0888-613x(96)00115-6 open in new tab
- Liu, L., Shenoy, C. & Shenoy, P. (2006). Knowledge Representation and Integration for Portfolio Evaluation Using Linear Belief Functions. IEEE Transactions on Systems, Man, and Cybernetics. Series A. 36 (4). 774-785. https://doi.org/10.1109/tsmca.2005.855759. Loyelt, A. & Gurov, I. (2010).The process of formation of inflation expectations in an information economy. IFC Bulletin. No.34. BIS. Łyziak, T. (2003). Consumer inflation expectations in Poland. ECB Working Paper 287. Łyziak, T. (2010). Measurement of perceived and expected inflation on the basis of consumers survey data. Irving Fisher Committee on Central Bank Statistic Working Papers. open in new tab
- Łyziak, T. (2013). Formation of inflation expectations by different economic agents. The Case of Poland. Eastern European Economics. 51(6), 5-33. open in new tab
- https://doi.org/10.2753/eee0012-8775510601 open in new tab
- Łyziak, T. & Paloviita, M. (2017a). Anchoring of inflation expectations in the euro area: Recent evidence based on survey data. European Journal of Political Economy. 46 (C ), 52-73. https://doi.org/10.1016/j.ejpoleco.2016.11.001 open in new tab
- Łyziak, T. & Paloviita, M. (2017b). Formation of inflation expectations in turbulent times : Can ECB manage inflation expectations of professional forecasters? Research Discussion Papers 13/2017. Bank of Finland.
- Malmendier, U. & Nagel, S. (2015). Learning from inflation experiences. The Quarterly Journal of Economics.131(1), 53-87. https://doi.org/10.1093/qje/qjv037 open in new tab
- Mankiw, G., Reis, R. & Wolfers, J. (2003). Disagreement about Inflation Expectations. NBER Working Paper 9796. https://doi.org/10.3386/w9796. open in new tab
- March, J. (1973). Model Bias in Social Action. Review of Educational Research. 42(4). 413-429. https://doi.org/10.2307/1169894. open in new tab
- Marimon, R. & Sunder, S. (1994). Expectations and learning under alternative monetary regimes: An experimental approach. Economic Theory. 4(1), 131-162. https://doi.org/10.1007/bf01211121. open in new tab
- Milani, F. (2007). Expectations, Learning and Macroeconomic Persistence. Journal of Monetary Economics. 54, 2065-2082. https://doi.org/10.1016/j.jmoneco.2006.11.0007 open in new tab
- Muth, J. (1961). Expectations and the Theory of Price Movements. Econometrica. 29(3), 315- 335. https://doi.org/10.2307/1909635. Nosofsky, R. (1986). Attention, Similarity, and the Identification-Categorization Relationship. Journal of Experimental Psychology. 115(1), 39-57. open in new tab
- https://doi.org/10.1037//0096-3445.115.1.39. open in new tab
- Orphanides, A. & Williams, J. 2005. The Decline of Activist Stabilization Policy: Natural Rate Misperceptions, Learning and Expectations. Journal of Economic Dynamics and Control. 29, 1927-1950. https://doi.org/10.1016/j.jedc.2005.06.004 open in new tab
- Payne, J & Braunstein, M. (1971). Preferences among Gambles with Equal Underlying Distributions. Journal of Experimental Psychology. 87(1), 13-18. open in new tab
- https://doi.org/10.1037/h0030194. Pfajfar, D. & Santoro, E. (2009). Asymmetries in inflation expectations across sociodemographic groups. Mimeo. Tilburg University. open in new tab
- Pfajfar, D. (2013). Formation of rationally heterogeneous expectations. Journal of Economic Dynamics and Control. 37(8), 1434-1452. open in new tab
- https://doi.org/10.1016/j.jedc.2013.03.012. open in new tab
- Pfajfar, D. & Žakelj, B. (2016). Inflation expectations and monetary policy design: evidence from the laboratory. Macroeconomic Dynamics. 20(4), 1035-1075.https://doi.org/ 10.1017/s1365100516000560. Radner, R. (1975). Satisficing. Journal of Mathematical Economics. 2(2), 253- 262. https://doi.org/10.1016/0304-4068(75)90027-0 open in new tab
- Rehm, J. & Gadenne, V. (2013). Intuitive Predictions and Professional Forecasts. Cognitive processes and social consequences. Pergamon Press. NY. Rescorla, R. (1971). Variation in the effectiveness of reinforcement and nonreinforcement following prior inhibitory conditioning. Learning and Motivation. 2(2), 113-123. https://doi.org/10.1016/0023-9690(71)90002-6 open in new tab
- Shafer, G. (1992). A note on Dempster's Gaussian belief functions. School of Business. University of Kansas. Lawrence KS. Technical Report. open in new tab
- Shepard, R. (1987). Toward a Universal Law of Generalization for Psychological Science. Science. 237 (4820), 1317-1323. https://doi.org/10.1126/science.3629243 open in new tab
- Singh, H. (1986). When are expectations rational? Some vexing questions and behavioral clues. Journal of Behavioral Economics. 15 (1-2), 191-209. https://doi.org/10.1016/0090- 5720(86)90068-9 open in new tab
- Simon, H. (1978). Rationality as Process and as Product of thought. American Economic Review. 68(2), 1-16. https://doi.org/10.1017/cbo9780511598951.005. Sims, C. (2003). Implications of rational inattention. Journal of Monetary Economics. open in new tab
- , 665-690. https://doi.org/10.1016/s0304-3932(03)00029-1 open in new tab
- Sims, C. (2010). Rational inattention and monetary economics. Handbook of Monetary Economics. 3, 155-181. https://doi.org/10.1016/b978-0-444-53238-1.00004-1 open in new tab
- Slovic, P & Lichtenstein, S. (1968). Relative importance of Probabilities and Payoffs in Risk Taking. Journal of Experimental Psychology. 78(3), 1-18. open in new tab
- Svensson, L.E.O. (1997). Inflation forecasts targeting: implementing and monitoring inflations targets. European Economic Review. vol. 41 (6), 1111-1146. https://doi.org/10.1016/S0014-2921(96)00055-4. open in new tab
- Svensson, L.E.O.(1999). Inflation Targeting as a Monetary Policy Rule. Journal of Monetary Economics. 43, 607-654. https://doi.org/10.1016/s0304-3932(99)00007-0 open in new tab
- Svensson, L.E.O. & Woodford, M. (2003). Implementing Optimal Policy through Inflation-Forecast Targeting. NBER Working Papers 9747. National Bureau of Economic Research. Svensson L.E.O. (2005). Monetary Policy with Judgment: Forecast Targeting, International Journal of Central Banking. 1(1), 1-54. open in new tab
- Svensson, L.E.O. & Tetlow, R. (2005). Optimal Policy Projections. International Journal of Central Banking. 1(3), 177-207. open in new tab
- Svensson, L.E.O. (2009). Evaluating Monetary Policy. NBER Working Papers 15385. National Bureau of Economic Research. open in new tab
- Svensson, L.E.O. (2014). Forward Guidance. NBER Working Papers 20796. National Bureau of Economic Research. open in new tab
- Szyszko, M. (2017). Central Bank's Inflation Forecast and Expectations. A Comparative Analysis. Prague Economic Papers. 26 (3), 286-299. https://doi.org/10.18267/j.pep.614. Wallis, K. (2003). Chi squared tests of interval and density forecasts, and the Bank of England's fan charts. International Journal of Forecasting. 19(2), 165-175. open in new tab
- https://doi.org/10.1016/s0169-2070(02)00009-2. open in new tab
- Woodford, M. (2003). Interest and Prices. Foundations of Theory of Monetary Policy. Princeton University Press. Princeton.
- S A D last 1998.11 1999.08 2000.05 2001.02 2001.11 2002.08 2003.05 2004.11 2005.08 2006.05 2007.02 2007.11 2008.08 2009.05 2010.02 2010.11 2011.08 2012.05 2013.02 2013.11 2014.08 2015.05 2016.02 open in new tab
- Endog. 2007.2 2008.1 2008.3 2009.2 2010.1 2010.3 2011.2 2012.1 2012.3 2013.2 2014.1 2014.3 2015.2 2016.1 open in new tab
- Sources of funding:
- Verified by:
- Gdańsk University of Technology
seen 134 times