Directional analysis of consumers’ forecasts of inflation in a small open economy: evidence from South Korea

Young Bin Ahn () and Yoichi Tsuchiya

Applied Economics, 2016, vol. 48, issue 10, 854-864

Abstract: We evaluate the directional accuracy of consumers’ forecasts of inflation in predicting the movement of the actual CPI in a small open economy. In order to do so, we use a method developed by Pesaran and Timmermann (2009), based on South Korean data. By illustrating an application of the new market-timing test, we show that consumers’ expectations of inflation are not a useful predictor of the CPI in South Korea. Our findings suggest that the directional accuracy of consumers’ 1-year-ahead forecasts of inflation is not affected by the inflation targeting of the Bank of Korea. Our findings also suggest that consumers’ 1-year-ahead forecasts of inflation are scattered away from the Bank of Korea’s inflation target.

Date: 2016
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DOI: 10.1080/00036846.2015.1088144

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