Do Inflation Expectations Granger Cause Inflation?

Pär Stockhammar () and Pär Österholm ()
Additional contact information
Pär Stockhammar: National Institute of Economic Research, Postal: National Institute of Economic Research, Box 3116, SE - 103 62 STOCKHOLM, Sweden
Pär Österholm: Örebro University School of Business, Postal: Örebro University, School of Business, SE - 701 82 ÖREBRO, Sweden, https://www.oru.se/english/employee/par_osterholm

No 2016:4, Working Papers from Örebro University, School of Business

Abstract: In this paper, we investigate whether survey measures of inflation expec-tations 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 Insti-tute 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.

Keywords: Bayesian VAR; Granger causality; Out-of-sample forecasts (search for similar items in EconPapers)
JEL-codes: C32 F43 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2016-10-03
New Economics Papers: this item is included in nep-for and nep-mac
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Related works:
Journal Article: Do inflation expectations granger cause inflation? (2018)
Working Paper: Do Inflation Expectations Granger Cause Inflation? (2016)
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