Do inflation expectations granger cause inflation?
- 12 Downloads
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.
KeywordsBayesian VAR Granger causality Out-of-sample forecasts
JEL ClassificationC32 E31 E52
We are grateful to two anonymous referees and seminar participants at the National Institute of Economic Research for valuable comments on this paper.
- Adolfson, M., Andersson, M. K., Lindé, J., Villani, M., & Vredin, A. (2007). Modern forecasting models in action: Improving macro economic analyses at central banks. International Journal of Central Banking, 3, 111–144.Google Scholar
- Beechey, M., Johannsen, B., & Levin, A. (2011). Are long-run inflation expectations anchored more firmly in the euro area than in the United States? American Economic Journal: Macroeconomics, 3, 104–129.Google Scholar
- Blanchard, O., Cerutti, E., & Summers, L. (2015). Inflation and activity—two explorations and their monetary policy implications, NBER Working Paper No. 21726.Google Scholar
- Canova, F., & Gambetti, L. (2010). Do expectations matter? The great moderation revisited. American Economic Journal: Macroeconomics, 2, 183–205.Google Scholar
- Christoffel, K., Coenen, G., & Warne, A. (2011). Forecasting with DSGE models. In M. P. Clements & D. F. Hendry (Eds.), The Oxford handbook of economic forecasting. Oxford: Oxford University Press.Google Scholar
- Clark, T. E., & Davig, T. (2008). An empirical assessment of the relationships among inflation and short- and long-term expectations, Research Working Paper 08-05, Federal Reserve Bank of Kansas City.Google Scholar
- Cogley, T., & Sargent, T. J. (2001). Evolving Post-World War II U.S. Inflation dynamics. NBER Macroeconomics Annual, 16, 331–373.Google Scholar
- Coibion, O., & Gorodnichenko, Y. (2015). Is the Phillips curve alive and well after all? Inflation expectations and the missing disinflation. American Economic Journal: Macroeconomics, 7, 197–232.Google Scholar
- Fuhrer, J. (2012). The role of expectations in inflation dynamics. International Journal of Central Banking, 8, 137–165.Google Scholar
- Gavin, W. T., & Kliesen, K. L. (2008). Forecasting inflation and output: Comparing data-rich models with simple rules. Federal Reserve Bank of St Louis Review, 90, 175–192.Google Scholar
- Gürkaynak, R., Levin, A. T., Marder, A. N., & Swanson, E. T. (2007). Inflation targeting and the anchoring of inflation expectations in the Western Hemisphere. Federal Reserve Bank of San Francisco Economic Review, 2007, 25–47.Google Scholar
- International Monetary Fund. (2013). World Economic Outlook, April 2013.Google Scholar
- Jonung, L. (1981). Perceived and expected rates of inflation in Sweden. American Economic Review, 71, 961–968.Google Scholar
- Knotek, E. S., & Zaman, S. (2017). Have inflation dynamics changed? Federal Reserve Bank of Cleveland Economic Commentary 2017-21.Google Scholar
- National Institute of Economic Research. (2009). Konjunkturläget, December 2009 (in Swedish).Google Scholar
- National Institute of Economic Research. (2014). The Swedish Economy, August 2014.Google Scholar
- Sveriges Riksbank. (2008). Separate Minutes of the Executive Board Meeting on 3 September 2008.Google Scholar
- Sveriges Riksbank. (2014). Minutes of the Monetary Policy Meeting on 2 July 2014.Google Scholar