DP10419 Forecasting Inflation using Survey Expectations and Target Inflation: Evidence for Brazil and Turkey

Author(s): Sumru G. Altug, Cem Cakmakli
Publication Date: February 2015
Keyword(s): Inflation forecasting, inflation targeting, state space models, survey-based expectation, term structure of inflation expectations
JEL(s): C32, C51, E31, E37
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10419

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.