Estimation of Inflationary Expectations and the Effectiveness of Inflation Targeting Strategy

Amalia Cristescu and Mădălina Ecaterina Andreica
Additional contact information
Amalia Cristescu: Bucharest Academy of Economic Studies
Mădălina Ecaterina Andreica: Bucharest Academy of Economic Studies
Authors registered in the RePEc Author Service: Madalina Ecaterina Popescu

Theoretical and Applied Economics, 2011, vol. XVIII(2011), issue 2(555), 195-206

Abstract: The credibility and accountability of a central bank, acting in an inflation targeting regime, are essential because they allow a sustainable anchoring of the inflationary anticipation of economic agents. Their decisions and behavior will increasingly be grounded on information provided by the central bank, especially if it shows transparency in the process of communicating with the public. Thus, inflationary anticipations are one of the most important channels through which the monetary policy affects the economic activity. They are crucial in the formation of the consumer prices among producers and traders, especially since it is relatively expensive for the economic agents to adjust their prices at short intervals. That is why many central banks use response functions containing inflationary anticipations, in their inflation targeting models. The most frequently problem in relation to these anticipations is that they are based on the assumption of optimal forecasts of future inflation, which are, implicitly, rational anticipations. In fact, the economic agents’ inflationary anticipations are most often adaptive or even irrational. Thus, rational anticipations cannot be used to estimate equations for the Romanian economy because the agents who form their expectations do not have sufficient information and an inflationary environment stable enough to fully anticipate the inflation evolution. The inflation evolution in the Romanian economy helps to calculate adaptive forecasts for which the weight of the "forward looking" component has to be rather important. The economic agents form their inflation expectations for periods of time that, usually, coincide with a production cycle (one year) and consider the official and unofficial inflation forecasts present on the market in order to make strategic decisions. Thus, in recent research on inflation modeling, actual inflationary anticipations of economic agents which are revealed based on national opinion surveys are being used. As a result of a previous study testing the equations of an inflation targeting model for Romania, the authors of this article attempt to correct the estimators of inflationary anticipations depending on the central bank reaction, based on the results of a national survey among the population. However, in order to have a more accurate picture of inflationary anticipations and the propagation mechanism of shocks affecting price stability, an analysis of the pricing behavior of the consumer goods bidders in the national economy is also needed.

Keywords: inflation targeting; transparency; accountability; reaction function. (search for similar items in EconPapers)
Date: 2011
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://store.ectap.ro/articole/567.pdf (application/pdf)
http://www.ectap.ro/articol.php?id=567&rid=71 (text/html)

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:agr:journl:v:2(555):y:2011:i:2(555):p:195-206

Access Statistics for this article

Theoretical and Applied Economics is currently edited by Mircea Dinu

More articles in Theoretical and Applied Economics from Asociatia Generala a Economistilor din Romania / Editura Economica Contact information at EDIRC.
Bibliographic data for series maintained by Mircea Dinu ().