Predictive Abilities of Inflation Expectations and Implications on Monetary Policy in Korea

Dongchul Cho and Wankeun Oh
Additional contact information
Dongchul Cho: KDI School of Public Policy and Management
Wankeun Oh: Hankuk University of Foreign Studies

Korean Economic Review, 2023, vol. 39, 257-276

Abstract: This paper examines the predictive abilities of various inflation expectation indicators for inflation in Korea. We conducted real-time out-of-sample forecasting experiments utilizing three inflation expectation indicators – the general public’s expectation, professional forecasters’ expectation, and break-even inflation (BEI). The results can be summarized as follows: (i) BEI is at least as useful as the other expectation indicators in forecasting inflation; (ii) regression-based models using industrial production, oil price, and exchange rate do not help out-of-sample inflation forecasting in general; (iii) the policy interest rate, in contrast, can significantly reduce the forecasting errors; and (iv) a one percent-point increase in the policy interest rate is estimated to suppress inflation for the subsequent 12 months by around one percent-point. These results suggest that monetary policy is effective for controlling inflation and a simple model using the policy interest rate and an inflation expectation indicator may be preferred for inflation forecasting.

Keywords: Inflation; Forecasting; BEI; Monetary Policy; Korea (search for similar items in EconPapers)
JEL-codes: E31 E37 E52 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://keapaper.kea.ne.kr/RePEc/kea/keappr/KER-20230101-39-1-09.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kea:keappr:ker-20230101-39-1-09

Access Statistics for this article

Korean Economic Review is currently edited by Kyung Hwan Baik

More articles in Korean Economic Review from Korean Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by KEA ().