Short-term Inflation Expectations: Evidence from a Monthly Survey: Note

Abstract

The assumption that economic agents have rational expectations is commonplace in studies of macroeconomic policy and asset market behavior. Research examining observable expectations from surveys, however, has generally found that the data reject the rational expectations hypothesis. Friedman (1980) reports that forecasts of long-term interest rates from surveys of financial market participants are not rational. Figlewski and Wachtel (1981) note that most investigators of the Livingston survey data on economists' inf lation expectations conclude that these data do not conform to the rational expectations hypothesis. British survey data on the inflation expectations of consumers, analyzed by Evans and Gulamani (1984), and on the inflation expectations of business firms, examined by Pesaran (1985), also appear inconsistent with rational expectations. The failure of survey data to pass tests of rationality have led researchers such as Mishkin (1983) to question the usefulness of survey data to proxy expectations. This paper examines a different source of expectations data, namely, the surveys of money market participants conducted by Money Market Services, Inc. (MMS). Data from the MMS surveys have been widely used in studies of how asset prices respond to unanticipated changes in economic variables.' Recent papers by Urich and Wachtel (1984), Pearce and Roley (1985), and Smirlock (1986) employ the median predicted inflation rate from the MMS survey to construct a measure of the unexpected component of inflation announcements.