Some Evidence on the Irrationality of Inflation Expectations in Turkey

Hakan Kara and Hande Kucuk ()

Working Papers from Research and Monetary Policy Department, Central Bank of the Republic of Turkey

Abstract: This study aims to add to the understanding of inflation expectations in Turkey. We conduct several tests to understand whether economic agents use all the available information to forecast inflation. The answer is a lucid �NO�: Using 5 different quantitative expectations series from 3 different surveys, we find that all the expectations series, except the one month ahead forecasts, are biased and inefficient. Furthermore, forecast errors in many cases are significantly correlated with exchange rate changes, revealing that agents do not take into account the lagged effects of the exchange rate movements on inflation while forming their expectations. That is, the role of exchange rate pass-through, as a determinant of inflation, is not well understood. These results also suggest that some form of deviation from rational expectations may be necessary�at least during the disinflation period�in modeling inflation dynamics.

Date: 2005
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:tcb:wpaper:0512

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