XXVI Edition

14-15-16 December 2017"

Rational Inflation Expectations in the Euro Area? A time-varying perspective

Sorić Petar, University of Zagreb, Faculty of Economics and Business
Lolić Ivana, University of Zagreb, Faculty of Economics and Business
Matošec Marina, University of Zagreb, Faculty of Economics and Business

This paper assesses the rationality of inflation expectations in the euro area by examining five different survey-based expectations indicators. We test the unbiasedness and efficiency of these indicators by viewing the Rational Expectations Hypothesis from a time-varying perspective in a state space framework. Our model shows that economic agents are the most biased in the onset of the 2008 crisis. We also show that both actual inflation figures and some of the analyzed fundamental variables significantly feed into agents’ expectations errors. Again, deviations from efficiency seem to be the most pronounced in the global financial crisis.

Area: Monetary Policy and Central Banking

Keywords: expected inflation, rational expectations, Consumer Surveys, Survey of Professional Forecasters, time-varying parameters model

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