Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/153155 
Authors: 
Year of Publication: 
2007
Series/Report no.: 
ECB Working Paper No. 721
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
This paper contributes to the old theme of testing for rationality of inflation expectations in surveys, using two very different surveys in parallel. Focusing on the euro area and using two well-known surveys that include questions on inflation expectations, the Consensus Forecast survey and the European Commission Household survey, a battery of tests is applied to inflation forecasts. Tests are based on a preliminary discussion of the meaning of Rational Expectations in the macro-economic literature, and how this maps into specific econometric tests. Tests used are both standard ones already reported in the literature and less standard ones of potential interest within the framework discussed. Tests focus on in-sample properties of the forecasts, both in static and dynamic settings, and in out-ofsample tests to explore the performance of the forecasts in a simulated out-of-sample setting. As a general conclusion, both surveys are found to contain potentially useful information. Although the Consensus Forecasts survey is the best one in terms of quality of the forecasts, rationality in the European Commission Household survey, once measurement issues are taken into account, cannot be ruled out.
Subjects: 
inflation forecasting
Rational Expectations
tests of rationality
JEL: 
C40
C42
C50
C53
E37
Document Type: 
Working Paper

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