On the Accuracy of the Probability Method for Quantifying Beliefs about Inflation

Thomas Maag ()

No 09-230, KOF Working papers from KOF Swiss Economic Institute, ETH Zurich

Abstract: This paper assesses the probability method for quantifying EU consumer survey data on perceived and expected inflation. Based on micro-data from the Swedish consumer survey that asks for both qualitative and quantitative responses, I find that the theoretical assumptions of the method do not hold. In particular, estimated models of response behavior indicate that qualitative inflation expectations are not ordered. Nevertheless, the probability method generates series that are highly correlated with the mean of actual quantitative beliefs. For quantifying the cross-sectional dispersion of beliefs, however, an index of qualitative variation outperforms the probability method.

Keywords: quantification; inflation expectations; inflation perceptions; qualitative response data; belief formation (search for similar items in EconPapers)
JEL-codes: C53 D84 E31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
Date: 2009-06
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Persistent link: http://EconPapers.repec.org/RePEc:kof:wpskof:09-230

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