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Discussion Paper Details

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Title: Forecasting Inflation using Survey Expectations and Target Inflation: Evidence for Brazil and Turkey

Author(s): Sumru G. Altug and Cem Cakmakli

Publication Date: February 2015

Keyword(s): Inflation forecasting, inflation targeting, state space models, survey-based expectation and term structure of inflation expectations

Programme Area(s): International Macroeconomics

Abstract: In this paper, we formulate a statistical model of inflation that combines data on survey expectations and the inflation target set by central banks.. Our model produces inflation forecasts that are aligned with survey expectations, thereby integrating the predictive power of the survey expectations together with the baseline model. We further incorporate the inflation target set by the monetary authority to examine the effectiveness of monetary policy in forming inflation expectations and therefore, predicting inflation accurately. Results indicate superior predictive power of the proposed framework compared to the model without survey expectations as well as several popular benchmarks such as the backward and forward looking Phillips curves and naive forecasting rule.

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Bibliographic Reference

Altug, S and Cakmakli, C. 2015. 'Forecasting Inflation using Survey Expectations and Target Inflation: Evidence for Brazil and Turkey'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10419