Rational expectations and fixed-event forecasts: an application to UK inflation

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 21 February 2003

Working Paper no. 176
By Hasan Bakhshi, George Kapetanios and Anthony Yates

This paper tests a version of the rational expectations hypothesis using ‘fixed-event’ inflation forecasts for the UK. Fixed-event forecasts consist of a panel of forecasts for a set of outturns of a series at varying horizons prior to each outturn. The forecasts are the prediction of fund managers surveyed by Merrill Lynch. Fixed-event forecasts allow tests for whether expectations are unbiased in a similar fashion to the rest of the literature. But they also permit particular tests of forecast efficiency to be conducted - whether the forecasts make best use of available information - that are not possible with rolling event data. The results show evidence of a positive bias in inflation expectations. Evidence for inefficiency is much less clear cut.

PDFRational expectations and fixed-event forecasts: an application to UK inflation

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