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Driving Forces of Inflation Expectations

Author

Listed:
  • Byeongdeuk Jang

    (Sungkyunkwan University)

  • Young Se Kim

    (Sungkyunkwan University)

Abstract

This paper addresses some important issues regarding the nature of inflation expectations. By utilizing measures of inflation expectations formed by consumers and professionals, a series of empirical applications are performed to identify main driving forces of variations in inflation expectations. Tests of forecast efficiency consistently indicate that survey expectations are not rational, and thus the expectations of real-world economic actors, not rational agents in a model, are found to be what matter for price setting. As a logical consequence of these findings, we explore potential factors agents rely on when forecasting inflation by looking more closely on price changes in consumption expenditure categories as well as some key macroeconomic aggregates. Empirical results suggest that agents think differently how aggregate inflation evolves mainly due to the fact that each type of agents employs a distinct set of information, which can be interpreted as a dominant source of disagreement among agents.

Suggested Citation

  • Byeongdeuk Jang & Young Se Kim, 2017. "Driving Forces of Inflation Expectations," Korean Economic Review, Korean Economic Association, vol. 33, pages 207-237.
    • Handle: RePEc:kea:keappr:ker-20171231-33-2-01
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Inflation; Survey Expectations; Disagreement; Forecast Error;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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