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Inflation expectations: are they rational? An empirical examination

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  • Swarna Dutt
  • Dipak Ghosh

Abstract

The rationality of the inflation expectation formation process is examined using the NBER-ASA survey's annual inflation forecasts. The non-stationarity of the relevant series, i.e. the actual (future spot) and the corresponding forecast inflation series allows for the application of cointegration techniques. The rationality hypothesis is separated into weak form (error stationarity) and strong form (parameter restriction) models, and sequentially tested. The powerful and robust null of cointegration technique is implemented, which also examines model stability over time. Inflation forecasts are weak (not strong) form rational.

Suggested Citation

  • Swarna Dutt & Dipak Ghosh, 2000. "Inflation expectations: are they rational? An empirical examination," Applied Economics Letters, Taylor & Francis Journals, vol. 7(2), pages 103-106.
    • Handle: RePEc:taf:apeclt:v:7:y:2000:i:2:p:103-106
    DOI: 10.1080/135048500351915
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