Measures Of Inflation Expectations Research Articles

A brief analysis of aggregate measures as an alternative to the median at Central Bank of Brazil's Survey of Professional Forecasts

Abstract This paper presents a brief analysis of representative measures of inflation expectations from Central Bank of Brazil's Survey of Professional Forecasts that are alternative to the median response. We build time series with the mode and core measures of inflation expectations from the panel of professional forecasts surveyed from January 2002 to September 2012. We compare them to the median response with respect to their predictive power in a 12-month-ahead horizon. We also compare the predictive power of the alternative measures with the realized core of consumer price inflation.

A Note on Central Bank Transparency and Credibility in Poland

This note extends the study by Lyziak et al. (2007), providing up-to-date assessment of central bank transparency in Poland. We highlight the role of inflation projections prepared by the staff of the National Bank of Poland in building transparency of monetary policy. The results suggest that central bank inflation projections, published since 2004, have led to improvements in the predictability of interest rate decisions.The note updates also previous estimates of the degree of central bank credibility in Poland, using survey-based measures of inflation expectations formed by consumers, enterprises and financial sector analysts. It is confirmed that inflation expectations of enterprises and – especially – of financial sector analysts display a high degree of anchoring at the NBP inflation target, while consumer inflation expectations are driven mainly by developments in subjectively perceived inflation.

The Monetary Approach to the Exchange Rate Determination for a “Petrocurrency”: The Case of Norwegian Krone

This paper, by following vector error correction modeling, empirically investigates some of the popular monetary models of the NOK/USD rate. The empirical results suggest that there is some scope for the monetary approach to explain the development of the NOK/USD during the period from 1997 to 2008. The coefficients in the co-integration equation of both money and output differentials are statistically significant and consistent with any of the forms of the monetary models. Moreover, empirical evidence for the proportionality between the exchange rate and relative money is provided. Our findings are robust across different measures of inflation expectations. Although there is no clear evidence regarding the exact version of the monetary model, the estimated unrestricted error correction models can fit the actual NOK/USD exchange rate. Finally, the short-term dynamics of the exchange rate are significantly affected by changes in crude oil prices.

Inflation Expectations in Poland

This paper presents survey-based direct measures of inflation expectations of consumers, enterprises and financial sector analysts in Poland. It then goes on to provide the results of testing those features of inflation expectations that seem the most important from the point of view of monetary policy and its transmission mechanism. Characteristics of inflation expectations in Poland are diversified across the analysed groups of economic agents. Inflation expectations of financial sector analysts and enterprises outperform those of consumers in terms of their accuracy and information content, however also consumer inflation expectations are to some extent forward-looking.

The Case for Higher Frequency Inflation Expectations

I present evidence that higher frequency measures of inflation expectations outperform lower frequency measures of inflation expectations in tests of accuracy, predictive power, and rationality. For decades, the academic literature has focused on three survey measures of expected inflation: the Livingston Survey, the Survey of Professional Forecasters, and the Michigan Surveys of Consumers. While these measures have been useful in developing models of forecasting inflation, the data are low frequency measures that are anachronistic in the modern era of high frequency and real-time data. I present a collection of 37 different measures of inflation expectations, including many previously unexploited monthly and real-time measures of inflation expectations. These higher frequency measures tend to outperform the standard three low frequency survey measures in tests of accuracy, predictive power, and rationality, indicating that there are benefits to using higher frequency measures of inflation expectations. Out of sample forecasts confirm the findings.

An Inflation Expectations Horserace

For decades, the academic literature has focused on three survey measures of expected inflation: the Livingston Survey, the Survey of Professional Forecasters, and the Michigan Survey. While these measures have been useful in developing models of forecasting inflation, the data are low frequency measures which appear anachronistic in the modern era of high frequency and real-time data. I present a collection of 37 different measures of inflation expectations, including many previously unexploited monthly and real-time measures of inflation expectations. These higher frequency measures tend to outperform the standard three low frequency survey measures in tests of accuracy, predictive power, and rationality, indicating that there are benefits to using higher frequency measures of inflation expectations. Out of sample forecasts confirm the findings.

Internet search behavior as an economic forecasting tool: The case of inflation expectations

This paper proposes a measure of real-time inflation expectations based on metadata, i.e., data about data, constructed from internet search queries performed on the search engine Google. The forecasting performance of the Google Inflation Search Index (GISI) is assessed relative to 37 other indicators of inflation expectations – 36 survey measures and the TIPS spread. For decades, the academic literature has focused on three measures of inflation expectations: the Livingston Survey, Survey of Professional Forecasters, and the Michigan Survey. While useful in developing models of forecasting inflation, these low frequency measures appear anachronistic in the modern era of higher frequency and real-time data. I demonstrate that higher frequency measures tend to outperform lower frequency measures in tests of accuracy, predictive power, and rationality. Furthermore, Granger Causality tests indicate that the GISI metadata indicator anticipates the inflation rate by 12 months, and out-of-sample forecasts show that the GISI has the lowest forecast error of all the inflation expectations indicators tested.

Have Market Views on the Sustainability of Fiscal Burdens Influenced Monetary Authorities' Credibility?

During the Great Crisis, most governments in industrial countries supported their domestic financial sector under stress and responded to strong declines in output growth with fiscal stimulus packages. Starting in 2010, attention focused on the sustainability of the resulting debt burdens. We conduct an empirical study to test whether in the United States, the euro area and the United Kingdom, views on the sustainability of fiscal burdens have influenced markets’ assessment of central banks’ commitment to price stability. Using a daily measure of inflation expectations extracted from nominal and indexed-linked government bonds, or inflation swaps, we test whether these react to alternative measures of fiscal burdens. These include rescue package announcements, credit default swap (CDS) spreads and changes in either the outlook or the credit rating of governments. We find no evidence of a significant effect of market participants’ perceptions of fiscal burdens on long-term inflation expectations in the United States, the euro area and the United Kingdom. These results are broadly consistent with the view that long term inflation expectations have remained well anchored.

The empirical validity of the New Keynesian Phillips curve using survey forecasts of inflation

This paper investigates the performance of the New Keynesian Phillips curve when survey forecasts of inflation are used to proxy for inflation expectations. Previous authors such as Brissimis and Magginas (2008) have applied survey measures of inflation expectations to the NKPC, and have concluded that these estimates are superior to those estimated using actual data on future inflation. However this approach employs the use of the labor income share as the proxy for real marginal cost, something which is highly problematic once we consider the countercyclicality of this variable. This paper develops and tests a procyclical marginal cost variable alongside various survey measures of inflation forecasts in the NKPC, while recognizing the problem of weak instruments that occurs when estimating the model using conventional GMM. We find that the NKPC produces a counter-intuitive negative and significant coefficient on procyclical marginal cost when surveys of inflation forecasts are used, which casts serious doubt on the empirical viability of the NKPC model, even when estimated with survey inflation forecasts.

A Model-Independent Maximum Range for the Liquidity Correction of TIPS Yields

The difference between nominal and real Treasury yields, also known as break-even inflation (BEI), is biased as a measure of inflation expectations and the associated risk premium due to liquidity differentials between nominal and real yields. In this paper, we use the additional information in inflation swap rates to construct a model-independent measure of the maximum range for the liquidity correction to real Treasury yields – also known as Treasury Inflation-Protected Securities (TIPS). In the empirical analysis, using the model of nominal and real yields introduced in Christensen, Lopez, and Rudebusch (2010), we show how the maximum range of liquidity-corrected TIPS yields converts into a maximum range for the estimated inflation expectations and their associated risk premium. We exploit the admissible range for the estimated inflation risk premium (IRP) to calculate a conservative measure of the benefit of TIPS to the U.S. Treasury by taking the smallest estimated IRP and deducting the maximum TIPS liquidity premium as well as the on-the-run nominal premium. At the ten-year maturity, the average of this measure over our sample is 7 basis points, leading us to conclude that the U.S. Treasury has benefited from issuing TIPS.

The Usefulness of Core PCE Inflation Measures

This paper examines a number of alternative PCE price inflation measures including overall PCE inflation, PCE inflation excluding food and energy, trimmed mean PCE inflation, component-smoothed inflation, variance-weighted inflation, inflation with weights based on disaggregated regressions, and survey measures of inflation expectations. When averaging across a handful of specifications based on the primary uses of a core inflation measure three conclusions arise: 1. Inflation rates for nearly all the measures best track ex-post trend inflation or predict future overall inflation when they are averaged over a considerable number of months. Overall PCE price inflation should be averaged over 18 months or longer. A shorter averaging period is appropriate for core measures, often on the order of 12 months. 2. Even after appropriately averaging each index, core inflation indexes generally perform better than overall inflation. 3. Exclusion indexes, such as PCE excluding food and energy, perform slightly worse than many other possible core inflation measures; trimmed mean PCE, or a variance-weighted index, may be better choice for a summary inflation measure.

The Usefulness of Core PCE Inflation Measures

This paper examines a number of alternative PCE price inflation measures including overall PCE inflation, PCE inflation excluding food and energy, trimmed mean PCE inflation, component-smoothed inflation, variance-weighted inflation, inflation with weights based on disaggregated regressions, and survey measures of inflation expectations. When averaging across a handful of specifications based on the primary uses of a core inflation measure three conclusions arise: 1. Inflation rates for nearly all the measures best track ex-post trend inflation or predict future overall inflation when they are averaged over a considerable number of months. Overall PCE price inflation should be averaged over 18 months or longer. A shorter averaging period is appropriate for core measures, often on the order of 12 months. 2. Even after appropriately averaging each index, core inflation indexes generally perform better than overall inflation. 3. Exclusion indexes, such as PCE excluding food and energy, perform slightly worse than many other possible core inflation measures trimmed mean PCE, or a variance-weighted index, may be better choice for a summary inflation measure.

Inflation Expectations and Risk Premiums in an Arbitrage‐Free Model of Nominal and Real Bond Yields

Differences between yields on comparable‐maturity U.S. Treasury nominal and real debt, the so‐called breakeven inflation (BEI) rates, are widely used indicators of inflation expectations. However, better measures of inflation expectations could be obtained by subtracting inflation risk premiums (IRP) from the BEI rates. We provide such decompositions using an affine arbitrage‐free model of the term structure that captures the pricing of both nominal and real Treasury securities. Our empirical results suggest that long‐term inflation expectations have been well anchored over the past few years, and IRP, although volatile, have been close to zero on average.

The Effect of Question Wording on Reported Expectations and Perceptions of Inflation

Public expectations and perceptions of inflation may affect economic decisions, and have subsequent effects on actual inflation. The Michigan Survey of Consumers uses questions about “prices in general” to measure expected and perceived inflation. Median responses track official measure of inflation, showing some tendency toward overestimation and considerable disagreement between respondents. Possibly, responses reflect how much respondents thought of salient personal experiences with specific prices when being asked about “prices in general.” Here, we randomly assigned respondents to questions about “prices in general,” as well as “the rate of inflation” and “price you pay.” Reported expectations and perceptions were higher and more dispersed for “prices in general” than for “the rate of inflation,” with “prices you pay” and “prices in general” showing similar responses patterns. Compared to questions about “the rate of inflation,” questions about “prices in general” and “prices you pay” focused respondents relatively more on personal price experiences - and elicited expectations that were more strongly correlate to the expected price increases for food and transportation, which were relatively large and likely salient, but not to the expected price increases for housing, which were relatively small and likely less salient. Our results have implications for survey measures of inflation expectations.

Dynamics of the Term Structure of UK Interest Rates

This paper models the evolution of monetary policy, the term structure of interest rates and the UK economy across policy regimes. We model the interaction between the macroeconomy and the term structure using a time-varying VAR model augmented with the factors from the yield curve. Our results suggest that the level, slope and curvature factors display substantial time variation, with the level factor moving closely with measures of inflation expectations. Our estimates indicate a large decline in the volatility of both yield curve and macroeconomic variables around 1992, when the United Kingdom first adopted an inflation-targeting regime. During the inflation-targeting regime, monetary policy shocks have been more muted and inflation expectations have been lower than in the pre-1992 era. The link between the macroeconomy and the yield curve has also changed over time, with fluctuations in the level factor becoming less important for inflation after the Bank of England independence in 1997. Policy rates appear to have responded more systematically to inflation and unemployment in the current regime. We use our time-varying macro-finance model to revisit the evidence on the expectations hypothesis.

Inflation Expectations and Risk Premiums in an Arbitrage-Free Model of Nominal and Real Bond Yields

Differences between yields on comparable-maturity U.S. Treasury nominal and real debt, the so-called breakeven inflation (BEI) rates, are widely used indicators of inflation expectations. However, better measures of inflation expectations could be obtained by subtracting inflation risk premiums from the BEI rates. We provide such decompositions using an estimated affine arbitrage-free model of the term structure that captures the pricing of both nominal and real Treasury securities. Our empirical results suggest that long-term inflation expectations have been well anchored over the past few years, and inflation risk premiums, although volatile, have been close to zero on average.

Improving Survey Measures of Household Inflation Expectations

Expectations about future inflation are generally thought to play an important role in households’ decisions about spending and saving. They are also of great interest to central bankers, who take them into account when determining policy or assessing the effectiveness of communications with the public. To help improve existing survey measures of inflation expectations, the Federal Reserve Bank of New York recently joined with other institutions and academic consultants to develop a set of survey questions that will yield more reliable information on households’ inflation expectations, inflation uncertainty, and expectations about future wage changes.

ISOLATING A MEASURE OF INFLATION EXPECTATIONS FOR THE SOUTH AFRICAN FINANCIAL MARKET USING FORWARD INTEREST RATES

AbstractThe inflation expectations channel of the transmission mechanism is generally recognised as crucial for the implementation of modern monetary policy. This paper briefly reviews the practices commonly employed for measuring inflation expectations in South Africa, and offers an additional method, which is market based. The methodologies of Nelson and Siegel and Svensson are applied to determine implied nominal and real forward interest rates. The difference between the nominal and real forward rates (called inflation compensation) on a particular day is then used as a proxy for the market's inflation expectations. This measure should not be viewed as a substitute for other measures of inflation expectations, but should rather supplement these in order to offer an additional insight.

Observed Inflation Forecasts and the New Keynesian Phillips Curve*

AbstractThis paper investigates the empirical success of the New Keynesian Phillips Curve (NKPC) in explaining US inflation when observed measures of inflation expectations are used in conjunction with the output gap. The paper contributes to the literature by addressing the important problem of serial correlation in the stylized NKPC and developing an extended model to account for this serial correlation. Contrary to recent results indicating no role for the output gap, we find it to be a statistically significant driving variable for inflation, with this finding robust to whether the inflation expectations series used relates to individual consumers, professional forecasters or the US Fed.

The TIPS Yield Curve and Inflation Compensation

For over ten years, the Treasury has issued index-linked debt. This paper describes the methodology for fitting a smoothed yield curve to these securities that is used at the Federal Reserve Board every day, and makes the estimates public. Comparison with the corresponding nominal yield curve allows measures of inflation compensation to be computed. We discuss the interpretation of inflation compensation, and provide evidence that it is not a pure measure of inflation expectations being distorted by inflation risk premium and liquidity premium components. We attempt to estimate the TIPS liquidity premium and to extract underlying inflation expectations. (JEL E31, E43, H63)