Abstract
We investigated the rationality of financial and real sectors’ CPI inflation expectations in Turkey using the multivariate panel cointegration method. The use of panel techniques strengthened our empirical results by not only increasing sample size but also allowing heterogeneity across groups of respondents. Having found the expectations irrational in the stricter sense, we proceeded to analyze the significance of both past and future inflation rates as determinants of agents’ future inflation forecasts. Both recursive and rolling estimates show that forecasters’ weight on future/target inflation rates versus past actual and expected inflation rates changes over time as unexpected shocks derail inflation from its disinflationary path. Lastly, we find asymmetry in expectations such that the response of inflation expectations to an increase in the inflation rate is twice the size of the response to a decrease in the inflation rate. This may indicate long delays in restoring credibility of central banks after a positive shock on the inflation rate. JEL Classifications: C23, D84, E31 Keywords: Inflation expectations, Inflation formation, Panel cointegration, Recursive regression
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callMore From: OECD Journal: Journal of Business Cycle Measurement and Analysis
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
