Do inflation expectations granger cause inflation?

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Abstract

In this paper, we investigate whether survey measures of inflation expectations in Sweden Granger cause Swedish CPI inflation. This is done by studying the precision of out-of-sample forecasts from Bayesian VAR models using a sample of quarterly data from 1996 to 2016. It is found that the inclusion of inflation expectations in the models tends to improve forecast precision. However, the improvement is typically small enough that it could be described as economically irrelevant. One exception can possibly be found in the expectations of businesses in the National Institute of Economic Research’s Economic Tendency Survey; when included in the models, these improve forecast precision in a meaningful way at short horizons. Taken together, it seems that the inflation expectations studied here do not provide a silver bullet for those who try to improve VAR-based forecasts of Swedish inflation. The largest benefits from using these survey expectations may instead perhaps be found among analysts and policy makers; they can after all provide relevant information concerning, for example, the credibility of the inflation target or challenges that the central bank might face when conducting monetary policy.

Keywords

Bayesian VAR Granger causality Out-of-sample forecasts 

JEL Classification

C32 E31 E52 

Notes

Acknowledgements

We are grateful to two anonymous referees and seminar participants at the National Institute of Economic Research for valuable comments on this paper.

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Copyright information

© Springer International Publishing AG, part of Springer Nature 2018

Authors and Affiliations

  1. 1.National Institute of Economic ResearchStockholmSweden
  2. 2.School of BusinessÖrebro UniversityÖrebroSweden

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