Working Papers, Konjunkturinstitutet - National Institute of Economic Research
Do Inflation Expectations Granger Cause Inflation?
() and Pär Österholm
Abstract: In this paper, we investigate whether survey measures of
inflation expectations in Sweden Granger cause Swedish CPI-inflation. This
is done by studying the precision of out-of-sample forecasts from Bayesian
VAR models using a sample of quarterly data from 1996 to 2016. It is found
that the inclusion of inflation expectations in the models tends to improve
forecast precision. However, the improvement is typically small enough that
it could be described as economically irrelevant. One exception can
possibly be found in the expectations of businesses in the National
Institute of Economic Research’s Economic Tendency Survey; when included in
the models, these improve forecast precision in a meaningful way at short
horizons. Taken together, it seems that the inflation expectations studied
here do not provide a silver bullet for those who try to improve VAR-based
forecasts of Swedish inflation. The largest benefits from using these
survey expectations may instead perhaps be found among analysts and policy
makers; they can after all provide relevant information concerning, for
example, the credibility of the inflation target or challenges that the
central bank might face when conducting monetary policy.
Keywords: Bayesian VAR; Granger causality; Out-of-sample forecasts; (follow links to similar papers)
JEL-Codes: C32; F43; (follow links to similar papers)
28 pages, October 3, 2016
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