Working Papers, Department of Economics, Lund University
The forecasting horizon of inflationary expectations and perceptions in the EU. Is it really 12 months?
() and Staffan Lindén
Abstract: The standard way today to obtain measures of inflationary
expectations is to use questionnaires to ask a representative group of
respondents about their beliefs of the future rate of inflation during the
coming 12 months. This type of data on inflationary expectations as well as
on inflationary perceptions has been collected in a unified way on an
EU-wide basis for several years. By now, probably the largest database on
inflationary expectations has been built up in this way. We use this
database to explore the forecasting horizons implicitly used by the
respondents to questions about the expected rate of inflation during the
coming 12 months. The analysis covers all EU member states that have
relevant data. We examine the forecast errors, the mean error and the
RMSEs, to study if the forecast horizon is truly 12 months as implied by
the questionnaires. Our working hypothesis is that the forecast error has a
U-shaped pattern, reaching its lowest value on the 12-month horizon. We
also study the "backcast" error for inflationary perceptions in a similar
way. Our exploratory study reveals large differences across countries. For
most countries, we get the expected U-shaped outcome for the forecast
errors. The horizon implicitly used by respondents when answering the
questions is not related to the explicit time horizon of the questionnaire.
On average respondents use the same horizon when answering both questions,
e.g. when respondents use a 12-month forecast horizon answering to the
question on future inflation, they use the same forward looking horizon
when answering to the question on past inflation. We suggest possible
explanations for the differences observed.
Keywords: Inflationary expectations; inflationary perceptions; forecasting error; forecasting horizon; EU; euro; (follow links to similar papers)
JEL-Codes: C33; E31; E32; E37; E58; (follow links to similar papers)
29 pages, January 26, 2011
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