1 Central Bank of Turkey Department of Research and Monetary Policy INFLATION EXPECTATIONS IN...
-
Upload
lee-hudson -
Category
Documents
-
view
221 -
download
0
Transcript of 1 Central Bank of Turkey Department of Research and Monetary Policy INFLATION EXPECTATIONS IN...
1
Central Bank of TurkeyDepartment of Research and Monetary Policy
INFLATION EXPECTATIONS IN TURKEY:HOW SERIOUSLY SHOULD
WE TAKE THEM?
A. Hakan KaraPrepared for the ICE-TEA Conference 11-13/09/2006
2
Expectations Matters
It is a “response” variable Observable measure of credibility
Question: Where do you expect inflation to be two years from now?CB’s favorite answer: The TARGET
Main policy transmission channel Implications for price setting
behavior, output-inflation tradeoff
3
Quantitative inflation expectations series in Turkey
Survey of Expectations CPI inflation
Business Survey PPI inflation
Manufacturing Industry Survey Manufacturing price inflation
CNBC-e and Reuters
4
Survey of Expectations
Current Month’s CPI inflation Two months ahead One year ahead End-year Recently, two years ahead and one
month ahead expectations
5
Monthly inflation and expectations
-1
0
1
2
3
4
5
6
7
Aug
-01
Nov
-01
Feb-
02
May
-02
Aug
-02
Nov
-02
Feb-
03
May
-03
Aug
-03
Nov
-03
Feb-
04
May
-04
Aug
-04
Nov
-04
Feb-
05
May
-05
Aug
-05
Nov
-05
Feb-
06
May
-06
InflationExpectation for current monthExpectation for 2-months ahead
6
End-year Inflation Expectations
MIN, MAX and the TARGETMIN, MAX and the TARGET
0
10
20
30
40
50
60
70
Jan-2002 Jan-2003 Jan-2004 Jan-2005 Jan-2006
Target
Max.
Min.
7
Inflation outturns were below one-year ahead expectations throughout 2002-2005
0
10
20
30
40
50
60
Aug
-02
Nov
-02
Feb
-03
May
-03
Aug
-03
Nov
-03
Feb
-04
May
-04
Aug
-04
Nov
-04
Feb
-05
May
-05
Aug
-05
Nov
-05
Feb
-06
May
-06
Expected Inf.
Inflation
8
Testing the Performance of Inflation Expectations
Unbiasedness Do agent’s systematically overestimate
and/or underestimate inflation? Efficiency
Do agents use the available information to forecast inflation?•Learning from past mistakes•Using other relevant information
10
Results of Unbiasedness Tests
Dependent Variable
Expectation Sample Sample Size 0 1 2 MA
Monthly CPI Inflation Current-month 2001:08-2006:07 60 -0.13 1.02 0.68 0 (0.144) (0.072) (0.51)
Monthly CPI Inflation 2-months ahead 2001:10-2006:07 58 -0.05 0.92 1.55 2 (0.205) (0.148) (0.46)
Annual CPI Inflation 12-months ahead 2002:08-2006:07 48 1.63 0.65 118.5 12 (1.551) (0.043) (0.00)
11
Recursive Learning Behavior
Rolling Coefficients Rolling Coefficients ffor Unbiasednessor Unbiasedness (current month) (current month)
((HHoo:: α0==0 and α1 =1)=1)
-0.60
-0.50
-0.40
-0.30
-0.20
-0.10
0.00
Jul-0
4
Sep
-04
Nov
-04
Jan-
05
Mar
-05
May
-05
Jul-0
5
Sep
-05
Nov
-05
Jan-
06
Mar
-06
May
-06
Jul-0
6 0.96
0.98
1.00
1.02
1.04
1.06
1.08
1.10
1.12
1.14
1.16
α0
α1 (secondary axis)
12
Rolling Coefficients for UnbiasednessRolling Coefficients for Unbiasedness ( (12-months ahead12-months ahead))
((((HHoo:: α0==0 and α1 =1)=1)
One year ahead expectations are biased
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
Jul-0
5
Aug
-05
Sep
-05
Oct
-05
Nov
-05
Dec
-05
Jan-
06
Feb
-06
Mar
-06
Apr
-06
May
-06
Jun-
06
Jul-0
6
0.60
0.62
0.64
0.66
0.68
0.70
0.72
0.74
α1 (secondary axis)
α0
14
Results of Weak Efficiency Test
Weak Efficiency Tests for CPI Inflation Expectations(CBT Survey of Expectations)
Kaynak: IMF IFS
Dependent Variable
Expectation Sample Sample Size 0 1 2 2 MA
Monthly CPI Inflation Current-month 2001:10-2006:07 58 -0.14 0.07 -0.10 1.22 0 (0.09) (0.12) (0.12) (0.31)
Monthly CPI Inflation Next 2-months 2002:01-2006:07 55 -0.21 0.01 - 2.42 2 (0.13) (0.14) - (0.30)
Annual CPI Inflation Next 12-months 2003:09-2006:07 35 -2.14 0.27 - 15.45 12 (3.68) (0.23) - (0.00)
15
Strong Efficiency Test
1 1 2 Cons 3.09
(0.33) 0.86
(0.81) 2.45
(0.51) cpit 1 -0.05
(0.65) -0.14 (0.27)
-0.20 (0.15)
wpit 1 0.03
(0.70) -0.04 (0.61)
0.03 (0.73)
E xchange ratet-1 0.03 (0.21)
0.08 (0.01)
-
Onct-1 -0.01 (0.35)
-0.003 (0.77)
-0.004 (0.75)
Cut-2 -0.04 (0.32)
-0.01 (0.84)
-0.03 (0.52)
Salest-2 0.02 (0.13)
-0.002 (0.89)
0.01 (0.69)
Dddt-2 0.07 (0.11)
0.03 (0.60)
0.02 (0.72)
F-stat 1.47 (0.19)
34.71 (0.00)
9.81 (0.20)
Sample 01:08- 06:07 01:10-06:07 01:10-06:07 Sample size 60 58 58 MA 0 2 2
Current month 2-months ahead
16
How well the exchange rate explain the forecast errors?
Moving Moving Window EstimatesWindow Estimates
Kaynak: TÜİK, TCMB.
-0.040
-0.020
0.000
0.020
0.040
0.060
0.080
0.100
Sep
-04
Oct
-04
Nov
-04
Dec
-04
Jan-
05
Feb
-05
Mar
-05
Apr
-05
May
-05
Jun-
05
Jul-0
5
Aug
-05
Sep
-05
Oct
-05
Nov
-05
Dec
-05
Jan-
06
Feb
-06
Mar
-06
Apr
-06
May
-06
Jun-
06
Jul-0
6
17
Conclusion-1
Performance of the short term expectations have improved over time
The degree of unbiasedness and efficiency have increased gradually
However, the longer term forecasts are biased and inefficient
18
Conclusion-2
Private agents’ expectations should not serve as the main “response variable” for the monetary authority
The essence of building structural models
19
Conclusion-3
Agents largely focus on the short term inflation outlook
Temporary or one-off shocks to inflation may lead to undesired volatility in the financial markets
Maintaining a medium term strategy remains to be a challenge
CB should lead the markets Necessitates intensive effort in
communication
20
Central Bank of TurkeyDepartment of Research and Monetary Policy
INFLATION EXPECTATIONS: HOW SERIOUSLY SHOULD WE
TAKE THEM?
A. Hakan Kara
Prepared for the ICE-TEA Conference 11-13/09/2006
21
Targets and expectations for 12-month ahead inflation versus realizations
0
10
20
30
40
50
60
70
%
12 Months Ahead Expected Inflation
Annual Inflation
Targeted Path
Target path
Expected Inf.
22
How do agents form expectations?
Kaynak: TCMB.
Simple OLS Results
12 Months Ahead Expected Inflation = * Past Annual CPI + (1-)* Targeted Path Sample: 2001:09-2005:12
12 Months Ahead Expected Inflation Sum of Coefficients
Restricted to 1
Unrestricted
Coefficients
Targeted Path (1-) 0.66 0.65
Past Annual CPI 0.34 0.38
23
Expectations and fitted values
Kaynak: TÜİK, TCMB.
0
10
20
30
40
50
09.01
01.02
05.02
09.02
01.03
05.03
09.03
01.04
05.04
09.04
01.05
05.05
09.05
%12 Months Ahead ExpectedInflation
Fitted