Search published articles
Showing 3 results for Inflation Expectations
Mr Abolfazl Dehghani, Dr Kazem Yavari, Dr Mehdi Haj Amini, Dr Mohammad Hassan Zare,
Volume 0, Issue 0 (12-2024)
Volume 0, Issue 0 (12-2024)
Abstract
Aim and Introduction
Measurement and examination of unobservable variables directly such as inflation expectations or potential output, is really challenging. Inflation expectations have been considered a key variable in many macroeconomic models, particularly in the realm of monetary economics. Macroeconomic models assume that economic agents make consumption, savings, and labor market decisions based on their perception of future inflation levels, and these decisions play a great role in realizing economic variables, including inflation. The role of inflation expectations differs from other inflation-generating factors. While factors such as money supply, budget deficit, exchange rate, and to some extent, economic sanctions can be considered as policy tools. Inflation expectations normally result from the interaction of other factors and may potentially predict future inflation. For example, an increase in the budget deficit, if not addressed independently by the Central Bank, can lead to an increase in money supply, inflation, and intensification of inflation expectations. Thus, inflation expectations can be considered as a variable that evolves within society and changes due to other inflation-generating factors. However, once formed, these expectations themselves become significant factors in inflation and other economic variables. Unlike many countries, in Iran, despite the importance of inflation due to decades of double-digit inflation, no action has been taken to produce and provide survey data related to this variable. However, according to existing literature, comparing the results of alternative methods incorporating inflation expectations with survey data can provide valuable insights. In practice, incorporating inflation expectations can improve the performance of inflation prediction models.
Methodology
Empirical research indicates that methods that consider inflation expectations along with its fluctuations and dynamics outperform models that do not consider these dynamics. Therefore, paying proper attention to how inflation expectations form and fluctuate, as well as avoiding simple methods, is necessary in calculating inflation expectations. In this research, an attempt was made to calculate and present data related to this variable in the framework of rational expectations for the period of 1996 to 2021 using the random forest regression method, considering the strengths and weaknesses of each method of mapping inflation expectations. Subsequently, after learning the random forest-based model, by conducting an in-sample prediction, the data were extracted and the features related to rational expectations regarding these data were examined.
Findings
The coefficient of determination value for the test data was found to be 80%, indicating that, on average, 80% of inflation variations are correctly predicted by economic factors using the model inputs or features. Based on this and by examining the features related to estimation residuals, it was determined that economic factors in predicting inflation do not exhibit systematic errors and, with a sufficiently large time interval and having an adequate information set, can have a proper understanding of inflation behavior. Moreover, the results of comparing inflation expectations based on random forest regression-based predictions show superiority of this approach compared to competing methods such as the Hodrick-Prescott filter. After that, the importance of each of the factors in the basket of information related to inflation expectations was ranked. It should be noted that the selection of features for predicting inflation expectations was not based on the direct attention of households and economic factors to these features. Rather, economic factors and households may find the effect of these features in other evidence. For example, the effect of an increase in the exchange rate on the prices of goods that are somehow related to this variable may be apparent to households, and fundamentally, the prevalent interpretation of rational expectations in the literature of this field is based on this approach. The results of this ranking indicate that among the entire information set, factors such as inflation breaks, exchange rates, and economic sanctions had the highest importance in shaping inflation expectations.
Discussion and Conclusion
It is worth mentioning that inflation breaks have been identified as the most important factor among the entire information set as a manifestation of the adaptive section of inflation expectations. However, this does not mean that expectations are entirely adaptive. Based on the research findings, it is clear that if economic factors rely solely on the adaptive section to predict inflation, zero estimation error, unpredictability of errors, and consequently the formation of rational expectations will not be achieved. Using a combination of three approaches: gradient boosting algorithm, random forest algorithm, and linear regression, a voting regression was also performed, showing a 3% improvement in determination coefficient compared to random forest (83%). Moreover, other results, such as the order and intensity of feature importance, and predicted inflation values, are similar to the random forest method with slight variations which means, estimating rational expectations is reliable
Measurement and examination of unobservable variables directly such as inflation expectations or potential output, is really challenging. Inflation expectations have been considered a key variable in many macroeconomic models, particularly in the realm of monetary economics. Macroeconomic models assume that economic agents make consumption, savings, and labor market decisions based on their perception of future inflation levels, and these decisions play a great role in realizing economic variables, including inflation. The role of inflation expectations differs from other inflation-generating factors. While factors such as money supply, budget deficit, exchange rate, and to some extent, economic sanctions can be considered as policy tools. Inflation expectations normally result from the interaction of other factors and may potentially predict future inflation. For example, an increase in the budget deficit, if not addressed independently by the Central Bank, can lead to an increase in money supply, inflation, and intensification of inflation expectations. Thus, inflation expectations can be considered as a variable that evolves within society and changes due to other inflation-generating factors. However, once formed, these expectations themselves become significant factors in inflation and other economic variables. Unlike many countries, in Iran, despite the importance of inflation due to decades of double-digit inflation, no action has been taken to produce and provide survey data related to this variable. However, according to existing literature, comparing the results of alternative methods incorporating inflation expectations with survey data can provide valuable insights. In practice, incorporating inflation expectations can improve the performance of inflation prediction models.
Methodology
Empirical research indicates that methods that consider inflation expectations along with its fluctuations and dynamics outperform models that do not consider these dynamics. Therefore, paying proper attention to how inflation expectations form and fluctuate, as well as avoiding simple methods, is necessary in calculating inflation expectations. In this research, an attempt was made to calculate and present data related to this variable in the framework of rational expectations for the period of 1996 to 2021 using the random forest regression method, considering the strengths and weaknesses of each method of mapping inflation expectations. Subsequently, after learning the random forest-based model, by conducting an in-sample prediction, the data were extracted and the features related to rational expectations regarding these data were examined.
Findings
The coefficient of determination value for the test data was found to be 80%, indicating that, on average, 80% of inflation variations are correctly predicted by economic factors using the model inputs or features. Based on this and by examining the features related to estimation residuals, it was determined that economic factors in predicting inflation do not exhibit systematic errors and, with a sufficiently large time interval and having an adequate information set, can have a proper understanding of inflation behavior. Moreover, the results of comparing inflation expectations based on random forest regression-based predictions show superiority of this approach compared to competing methods such as the Hodrick-Prescott filter. After that, the importance of each of the factors in the basket of information related to inflation expectations was ranked. It should be noted that the selection of features for predicting inflation expectations was not based on the direct attention of households and economic factors to these features. Rather, economic factors and households may find the effect of these features in other evidence. For example, the effect of an increase in the exchange rate on the prices of goods that are somehow related to this variable may be apparent to households, and fundamentally, the prevalent interpretation of rational expectations in the literature of this field is based on this approach. The results of this ranking indicate that among the entire information set, factors such as inflation breaks, exchange rates, and economic sanctions had the highest importance in shaping inflation expectations.
Discussion and Conclusion
It is worth mentioning that inflation breaks have been identified as the most important factor among the entire information set as a manifestation of the adaptive section of inflation expectations. However, this does not mean that expectations are entirely adaptive. Based on the research findings, it is clear that if economic factors rely solely on the adaptive section to predict inflation, zero estimation error, unpredictability of errors, and consequently the formation of rational expectations will not be achieved. Using a combination of three approaches: gradient boosting algorithm, random forest algorithm, and linear regression, a voting regression was also performed, showing a 3% improvement in determination coefficient compared to random forest (83%). Moreover, other results, such as the order and intensity of feature importance, and predicted inflation values, are similar to the random forest method with slight variations which means, estimating rational expectations is reliable
Mrs Zhila Saleki, Dr Reza Ranjpour, Dr Elham Nobahar,
Volume 0, Issue 0 (12-2024)
Volume 0, Issue 0 (12-2024)
Abstract
Aim and Introduction
The central bank operates by setting an inflation target and implementing monetary policies to achieve its economic goals. The accurate estimation and calculation of actual inflation in society are crucial for establishing the correct inflation target. Any discrepancy between the set inflation target and real inflation can disrupt the central bank's policy-making. If the actual inflation differs from the inflation perceived by society, it can further complicate the central bank's decision-making process.
Society's perception of inflation, as reflected in inflation expectations, refers to consumers' personal feelings and assessments of the rate at which market prices are rising. This perception is often associated with an increase in the cost of living, products, and services, as well as a decrease in the standard of living. Criticisms have been raised regarding the rationality of individuals when estimating inflation rates. Carroll's epidemiological model (2001) posits that individuals form their expectations of future inflation based on the information they receive, such as expert forecasts published in articles. Those who do not encounter such articles may rely on previous inflation statistics and forecasts they have come across.
Initially, the influence of the media on society's perception of inflation was considered. Subsequent developments in this theory led to the identification of various experimental factors from different societal studies that can impact this perception. It is crucially important to note that factors other than those involved in the calculation of the inflation rate can also influence this index.
Methodology
This study investigates inflation perception through both qualitative and quantitative approaches and explores its relationship with potential influencing factors. The Consumer Inflation Expectations Index quantifies the percentage by which consumers anticipate prices of goods and services to fluctuate over the next 12 months. The index is constructed by developing a questionnaire that reflects the socio-economic conditions of the countries under study. The questionnaire encompasses various inquiries pertaining to past experiences of price changes, personal financial circumstances, business conditions, purchasing power, expectations regarding interest rates and inflation, and significant purchasing and saving intentions. Understanding the determinants of perceived inflation is vital for the efficacious implementation of policies within a society. This research was conducted within a comprehensive framework, evaluating a sample of 384 consumers in the city of Tabriz. Participants were selected randomly in November 2023 and consisted of either household heads or family members responsible for a substantial proportion of household expenditures, all aged 15 and older. The causal-comparative method was utilized to analyze the collected data, acknowledging that individual perceptions of inflation may be influenced by variables such as geographical location, gender, level of knowledge and education, performance, attitude, and subjective norms. Some of these variables may be inherent traits that are unchangeable, while others may be external factors beyond the control of the researcher or unethical to manipulate. Furthermore, this method was employed to identify factors associated with unsuccessful policy implementation to prevent their recurrence, as well as to pinpoint and cultivate beneficial factors.
Findings
The survey results from this study indicate that the perceived inflation rate in Tabriz in November 2023 was 70.54%, compared to 50.40% as reported by the Iranian Statistics Center for the same period, showing a discrepancy of approximately 20.14% between the community's perceived inflation rate and the official inflation rate. Additionally, the perceived inflation rate for October 2023 was estimated at 59.80%, which is higher than the official inflation rate of 51.20%. The forecasted perceived inflation rate for December 2023 was also examined, estimated at 57.83%, showing a decreasing trend compared to November's perceived inflation rate. This rate was compared with the official rate of 70.49% reported by the Statistics Center. The significant gap between perceived and official inflation rates confirms the high bias in the perceived inflation rate relative to the official rate and indicates a concurrent movement between the actual inflation rate and the perceived inflation rate. As a result, the impact of expected inflation, derived from perceived inflation, on the official inflation rate is validated. The results also revealed that perceived inflation rates are higher among women, part-time employees, manufacturing workers, unemployed educated individuals, and married people. Factors such as very low knowledge of the concept of inflation and related statistics, incorrect recollection of past prices, the disproportionate effect of frequent purchases, asymmetric perception of price increases and decreases, and household income levels play a significant role in explaining the highest perceptions of inflation rates. Furthermore, individual behaviors in purchasing and consuming goods have led to increased perceptions of inflation. The role of media and social networks in shaping inflation perceptions has been very prominent, with the highest perceived inflation rates attributed to the influence of reports from foreign media. Changes in the gold and currency markets also had the greatest impact on consumers' inflation rate estimates.
Discussion and Conclusion
The achievement of objectives stemming from policy implementation relies heavily on the accurate estimation of the said policies and the factors influencing their execution. This study has revealed that the perceived inflation rate and its influencing factors may deviate from the official inflation rate and its contributing factors. Inaccurate estimations heighten the risk of policy misalignments with predetermined goals. It is therefore imperative that estimating the perceived inflation rate and its influencing factors falls within the purview of executing centers and is factored into the planning of societal policies as a whole
The central bank operates by setting an inflation target and implementing monetary policies to achieve its economic goals. The accurate estimation and calculation of actual inflation in society are crucial for establishing the correct inflation target. Any discrepancy between the set inflation target and real inflation can disrupt the central bank's policy-making. If the actual inflation differs from the inflation perceived by society, it can further complicate the central bank's decision-making process.
Society's perception of inflation, as reflected in inflation expectations, refers to consumers' personal feelings and assessments of the rate at which market prices are rising. This perception is often associated with an increase in the cost of living, products, and services, as well as a decrease in the standard of living. Criticisms have been raised regarding the rationality of individuals when estimating inflation rates. Carroll's epidemiological model (2001) posits that individuals form their expectations of future inflation based on the information they receive, such as expert forecasts published in articles. Those who do not encounter such articles may rely on previous inflation statistics and forecasts they have come across.
Initially, the influence of the media on society's perception of inflation was considered. Subsequent developments in this theory led to the identification of various experimental factors from different societal studies that can impact this perception. It is crucially important to note that factors other than those involved in the calculation of the inflation rate can also influence this index.
Methodology
This study investigates inflation perception through both qualitative and quantitative approaches and explores its relationship with potential influencing factors. The Consumer Inflation Expectations Index quantifies the percentage by which consumers anticipate prices of goods and services to fluctuate over the next 12 months. The index is constructed by developing a questionnaire that reflects the socio-economic conditions of the countries under study. The questionnaire encompasses various inquiries pertaining to past experiences of price changes, personal financial circumstances, business conditions, purchasing power, expectations regarding interest rates and inflation, and significant purchasing and saving intentions. Understanding the determinants of perceived inflation is vital for the efficacious implementation of policies within a society. This research was conducted within a comprehensive framework, evaluating a sample of 384 consumers in the city of Tabriz. Participants were selected randomly in November 2023 and consisted of either household heads or family members responsible for a substantial proportion of household expenditures, all aged 15 and older. The causal-comparative method was utilized to analyze the collected data, acknowledging that individual perceptions of inflation may be influenced by variables such as geographical location, gender, level of knowledge and education, performance, attitude, and subjective norms. Some of these variables may be inherent traits that are unchangeable, while others may be external factors beyond the control of the researcher or unethical to manipulate. Furthermore, this method was employed to identify factors associated with unsuccessful policy implementation to prevent their recurrence, as well as to pinpoint and cultivate beneficial factors.
Findings
The survey results from this study indicate that the perceived inflation rate in Tabriz in November 2023 was 70.54%, compared to 50.40% as reported by the Iranian Statistics Center for the same period, showing a discrepancy of approximately 20.14% between the community's perceived inflation rate and the official inflation rate. Additionally, the perceived inflation rate for October 2023 was estimated at 59.80%, which is higher than the official inflation rate of 51.20%. The forecasted perceived inflation rate for December 2023 was also examined, estimated at 57.83%, showing a decreasing trend compared to November's perceived inflation rate. This rate was compared with the official rate of 70.49% reported by the Statistics Center. The significant gap between perceived and official inflation rates confirms the high bias in the perceived inflation rate relative to the official rate and indicates a concurrent movement between the actual inflation rate and the perceived inflation rate. As a result, the impact of expected inflation, derived from perceived inflation, on the official inflation rate is validated. The results also revealed that perceived inflation rates are higher among women, part-time employees, manufacturing workers, unemployed educated individuals, and married people. Factors such as very low knowledge of the concept of inflation and related statistics, incorrect recollection of past prices, the disproportionate effect of frequent purchases, asymmetric perception of price increases and decreases, and household income levels play a significant role in explaining the highest perceptions of inflation rates. Furthermore, individual behaviors in purchasing and consuming goods have led to increased perceptions of inflation. The role of media and social networks in shaping inflation perceptions has been very prominent, with the highest perceived inflation rates attributed to the influence of reports from foreign media. Changes in the gold and currency markets also had the greatest impact on consumers' inflation rate estimates.
Discussion and Conclusion
The achievement of objectives stemming from policy implementation relies heavily on the accurate estimation of the said policies and the factors influencing their execution. This study has revealed that the perceived inflation rate and its influencing factors may deviate from the official inflation rate and its contributing factors. Inaccurate estimations heighten the risk of policy misalignments with predetermined goals. It is therefore imperative that estimating the perceived inflation rate and its influencing factors falls within the purview of executing centers and is factored into the planning of societal policies as a whole
Seyyed Safdar Hosseini, Maryam Shokoohi,
Volume 15, Issue 1 (4-2015)
Volume 15, Issue 1 (4-2015)
Abstract
Inflation is the main problem which should be overcome both by the government and economic agents. The existence of inflation in an economy causes distortion and disequilibrium in the macroeconomic variables in the forms of decreasing growth rate, rising unemployment rate and uneven income distribution and so on. In addition, the uncertainties caused by the high inflation rates, raise the inflation expectations. This paper tries to found out which type of inflation expectations gives the better explanation of current inflation: backward-looking, forward-looking or some combination of the two? Using Generalized Method of Moments (GMM) and annual data over the period 1976-2008, the results of hybrid Philips model show that inflation in Iran is significantly determined by backward-looking inflation expectations, forward-looking inflation expectations, the output gap, exchange rate, and liquidity growth. However, backward-looking inflation expectations are more important than forward-looking expectations. The findings imply that managing inflation expectations, liquidity growth, and exchange rate can complement each other to achieve overall price stability.
| Page 1 from 1 |