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Uncertainty about Inflationary Perceptions and Expectations

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Abstract

This article reports the result of a survey designed to investigate the degree of uncertainty by which a representative sample of Swedish households hold their perceptions and expectations of inflation. The public displays hardly any uncertainty concerning the direction of change of the price level as measured by the ratio of ‘don't know’ answers. However, when asked for numerical estimates of the perceived and expected rate of inflation, uncertainty increases considerably. The ratio of ‘don't know’ answers is now about 45 per cent. Respondents giving numerical measures were asked to rank how certain they felt about their answers. The majority of them felt they were ‘rather certain’. A major difference in certainty was found between men and women. No major differences existed across age, place of living and education. The major conclusion of this study is that the public does not hold its inflationary perceptions and expectations with complete certainty as commonly assumed.

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... Women and old people tend to have more dispersion between the two answers, and hence less consistency, whilst newspaper readers especially of quality and local papers have less dispersion and more consistency. With respect to women this finding reinforces Jonung's (1986) results, where women appeared less certain than men about percentage-based changes in inflation, although there was no similar effect for age. Other researchers, for example Bates and Gabor (1986) and Kemp (1984), have found no effect for either age or sex. ...
... The answers to the percentage-based questions were both accurate and reasonable, supporting two hypotheses: It is possible to measure inflationary expectations in this way, and individuals are competent in the use of the mathematical technique of calculating percentage changes. This is in contrast to results previously reported by Jonung (1986) where approximately 45% of his sample declined to answer percentage-based questions. When turning to shopping basket-based expectations, one is led towards opposite conclusions. ...
Chapter
This paper compares estimates of different measures of inflationary expectations. Percentage-based expectations and perceptions of inflation appear accurate and reasonable. However, those derived from questions asking individuals how much they expect an £X bundle of goods to cost in a year’s time are less so. Moreover, the implied rate of inflation declines as X, the base price of the bundle of goods, increases and appears to converge to some limiting value. It appears reasonable to suggest that from this limiting value we can derive individuals’ true shopping basket based expectations. The question as to which of these two measures should be taken as representing the true rate of inflation is then discussed. Differences in the various measures are found to be related to age, sex, and information sources.
... Introduction A straightforward way to measure inflation perception and expectations of consumers is to ask them about their estimates quantitatively. However, the uncertainty concerning such numerical estimates is considerably higher than in the case of indicating direction of price changes (Jonung, 1986) and evidence on benefits from using quantitative questions is mixed. Therefore, most surveys are designed in a qualitative way, even if their results have to be later quantified. ...
... Consumers declaring qualitatively that the price level has changed (will change) are asked about their numerical estimates. As shown by Jonung (1986), when asked for numerical estimates of the perceived and expected rate of inflation, uncertainty increases considerably 14 . This puts constraints on the usefulness of quantitative survey questions concerning past inflation and inflation expectations and constitutes an argument in favour of using qualitative questions in policy analyses. ...
Article
Qualitative data on inflation perceptions and expectations, as obtained from surveys, can be quantified into numerical indicators of the perceived and expected rates of price change. This paper presents the results of different versions of probability and regression methods, implemented in order to estimate Polish consumer inflation perceptions and predictions, based on monthly consumer surveys. The paper also discusses the limited usefulness of quantitative questions, which occur to be excessively difficult for a significant part of respondents, whose numerical declarations are inconsistent with opinions expressed in a qualitative manner
... The decreases (in percentage points) are subsequently subtracted from the increases to obtain balance figures. A directional questionnaire is used, because directional changes have been found easier to predict than point values (Jonung, 1986). These balance data are seasonally adjusted by the data provider. ...
Article
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... Specifically, one asks the responding firms whether they expect certain variables to increase, decrease or remain stable over time, and subsequently subtracts all decrease (N eg) answers -in percentage points of total answers -from the percentage of increase (P os) ones. A directional questionnaire is used as directions of change have been found to be easier to predict than point values (Jonung, 1986) A visual inspection (seeFigure 1) reveals some apparent similarities in the PACC series among various member countries. Several of the series show a pronounced upward trend, but suffered from a temporary slowdown in the early 1990s (see e.g. the graphs for Belgium, France, Germany and the United Kingdom, among others). ...
Article
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... We explore the forecasting horizons implicitly used by the respondents when answering to questions about the expected rate of inflation during the coming 12 months in the EU Consumer 1 For a few examples see Jonung (1981), Jonung and Laidler (1988) and Jonung (1986). ...
Article
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We use survey based inflationary expectations to explore the forecasting horizons implicitly used by the respondents to questions about the expected rate of inflation during the coming 12 months. We examine the forecast errors, the mean error and the RMSEs, to study if the forecast horizon is truly 12 months as implied by the questionnaires. Our working hypothesis is that the forecast error has a U-shaped pattern, reaching its lowest value on the 12-month horizon. Our exploratory study reveals large differences across countries. For most countries, we get the expected U-shaped outcome for the forecast errors. The horizon implicitly used by respondents when answering the questions is not related to the explicit time horizon of the questionnaire. On average respondents use the same horizon when answering both questions.
... It thus follows that these survey data may provide useful leading information about movements in the Swedish industrial sector and aggregate output. A 1 Important research contributions include Theil (1952), Carlson and Parkin (1975), Batchelor (1982), Teräsvirta (1986), Hanssens and Vanden Abeele (1987), and Koskinen and Öller (1998). 2 Using Swedish survey data on inflationary perceptions, Jonung (1986) observed that the share of uncertain respondents increased as they were asked to provide numerical point estimates rather than only directional estimates. number of surveys are now conducted worldwide on a regular basis. ...
Article
An examination of Swedish manufacturing data on real output and qualitative business tendency survey (BTS) responses from 1968 through 1998 reveals that survey-based attitude data typically improve the fit of simple autoprojective models of manufacturing output growth. It also turns out that traditional autoregressive distributed lag (ADL) models based on business survey data can provide more accurate one-quarter-ahead forecasts of output growth than naive alternatives. Another finding is that when BTS variables concerning ex post (ex ante) output growth are included in the empirical specifications, then no other ex post (ex ante) business survey variables seems to include any additional information about output growth.
... This is the approach used in Figure 1 and 2. This methodology ignores the uncertainty that the public attaches to its replies concerning perceptions and expectations of inflation. People associate their perceived and expected rates with considerable uncertainty as demonstrated in Jonung (1986). For example, where the perceived inflation rate is 2.2 per cent as in Table 2, there is a confidence interval surrounding this point estimate that should be kept in mind when interpreting the survey responses and when evaluating the Riksbank's inflation targeting approach. ...
Article
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Syftet med denna rapport är att granska Lars E O Svenssons kritik av Riksbankens politik under perioden 1995-2012. Vi har en rad invändningar. Svensson har ett för snävt synsätt när han bedömer om Riksbanken har uppfyllt sitt inflationsmål. Hans ekonometriska resultat, vilka utmynnar i slutsatsen att Riksbankens penningpolitik bidragit till 38 000 fler arbetslösa per år under 1997-2011, är inte robusta. De vilar på en alltför enkel modell och på ett orealistiskt antagande om konstanta inflationsförväntningar. Det går ut på att allmänhetens inflationsförväntningar har legat konstanta på 2 procent. Så har inte varit fallet. Den negativa sysselsättningseffekten, som utgör Svenssons huvudkritik mot Riksbanken, försvinner när de faktiska inflationsförväntningarna inkluderas i modellerna. I ett bredare perspektiv ser vi andra svagheter i Svenssons argument. (i) Phillipskurvan, som Svensson använder den, är en för enkel modell för att dra några bestämda policy-slutsatser rörande arbetslöshet och sysselsättning i en öppen ekonomi som den svenska. (ii) Riksbanken har redan två mål: finansiell stabilitet och prisstabilitet. Att som Svensson lägga stark vikt på sysselsättningseffekter ger i praktiken ett tredje mål för Riksbanken. Detta ställer orimliga krav på penningpolitiken. (iii) Svensson har ett kort tidsperspektiv. Om vi jämför Riksbankens inflationsmålspolitik med övriga penningpolitiska regimer under de senaste 100 åren, så har Riksbanken varit osedvanligt framgångsrik under de senaste femton åren. Notera: Vår artikel "Riksbanken och inflationen 1995-2012 – missar Svensson målet? publicerad i Ekonomisk Debatt, nr 3, 2014, bygger på denna rapport. Här ger vi en fylligare redovisning av främst de ekonometriska skattningar som av utrymmesskäl inte kunde ingå i artikeln i Ekonomisk Debatt.
... This is the approach used in Figure 1 and 2. This methodology ignores the uncertainty that the public attaches to its replies concerning perceptions and expectations of inflation. People associate their perceived and expected rates with considerable uncertainty as demonstrated in Jonung (1986). For example, where the perceived inflation rate is 2.2 per cent as in Table 2, there is a confidence interval surrounding this point estimate that should be kept in mind when interpreting the survey responses and when evaluating the Riksbank's inflation targeting approach. ...
Article
Full-text available
We examine Lars E O Svensson's prominent critique of the monetary policy of the Sveriges Riksbank (the Swedish central bank) from 1995-2012. Our main objection concerns Svensson's conclusion that the original pre-Friedman/Phelps version of the Phillips curve based on constant inflation expectations has returned for Sweden. Based on estimates of this model, Svensson claims that that the Riksbank's policy has contributed to an average of 38 000 more unemployed a year between 1997-2011. This result is based on Svensson's unrealistic as well as unnecessary assumption of constant inflation expectations anchored at the Riksbank's inflation target of 2 per cent. Data show, however, that the public's inflation expectations have varied between 0 and 4 per cent, thus they have not been anchored. The negative employment effect found by Svensson vanishes once actual data on inflation expectations are included in the estimates of the Phillips curve. The long run non-vertical Phillips curve is transformed into a vertical one, in line with the Friedman/Phelps theory. We have additional objections to Svensson's reasoning. First, we show that the Riksbank has on average met its inflation target between 1995 and 2012. Second, we suggest that the original Phillips curve is too simple a model to draw any firm policy conclusions about unemployment and monetary policy in a small open economy such as Sweden. Third, we do not want to overburden Swedish monetary policy by making the Riksbank responsible for three objectives. It has already two objectives: price stability and financial stability. Criticising the Riksbank for employment losses, as Svensson does, gives priority to a third objective, high employment. Finally, Svensson adopts a short-term perspective by focusing on the period 1995-2011. When we compare the Riksbank's inflation targeting regime with previous monetary policy regimes over the past 100 years, inflation targeting in the past fifteen years is clearly one of the most successful.
... This is the approach used in Figure 1 and 2. This methodology ignores the uncertainty that the public attaches to its replies concerning perceptions and expectations of inflation. People associate their perceived and expected rates with considerable uncertainty as demonstrated in Jonung (1986). For example, where the perceived inflation rate is 2.2 per cent as in Table 2, there is a confidence interval surrounding this point estimate that should be kept in mind when interpreting the survey responses and when evaluating the Riksbank's inflation targeting approach. ...
Data
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We examine Lars E O Svensson’s prominent critique of the monetary policy of Swedish Riksbank 1995-2012. Our main objection concerns Svensson´s conclusion that the original pre-Friedman/Phelps version of the Phillips curve based on constant inflation expectations has returned for Sweden. Based on estimates of this model, Svensson claims that that the policy of the Riksbank has contributed to on average 38 000 unemployed per year during 1997-2011. This result is based on Svensson’s unrealistic as well as an unnecessary assumption of constant inflation expectations anchored at the Riksbank’s inflation target of 2 per cent. Data shows, however, that the public’s inflation expectations have varied between 0 and 4 per cent, thus they have not been anchored. The negative employment effect found by Svensson evaporates once actual data on inflation expectations are included in the estimates of the Phillips curve. The long run non-vertical Phillips curve is transformed into a vertical one, in line with the Friedman/Phelps view. Widening our discussion, we have additional objections to Svensson’s line of reasoning. First, we show that the Riksbank has met its inflation target 1995-2012. Second, we suggest that the original Phillips curve, as Svensson uses it, is too simple a model to draw any firm policy conclusions about unemployment and monetary policy in a small open economy such as the Swedish one. Third, we do not want to overburden Swedish monetary policy by making the Riksbank responsible for three objectives. It has already two objectives: price stability and financial stability. Criticizing the Riksbank for employment losses, as Svensson does, gives priority to a third objective concerning employment. Finally, Svensson adopts a short-term perspective by focusing on the period 1995-2011. When we compare the Riksbank’s inflation targeting regime starting in 1995 with previous monetary policy regimes over the past 100 years, the inflation targeting in the past fifteen years emerges as most successful.
... This approach, adopted in Figure 1 and 2, ignores the uncertainty that the respondents assign to their replies. People associate their perceived and expected rates with considerable uncertainty as demonstrated in Jonung (1986). For example, where the perceived inflation rate is 2.2 percent as in Table 2, there is an unknown confidence interval surrounding this point estimate that should be kept in mind when using the survey responses to evaluate the Riksbank's inflation targeting. ...
Article
Full-text available
Note: This is an updated and revised version of our paper “The return of the original Phillips curve? An assessment of Lars E.O. Svensson’s critique of the Riksbank’s inflation targeting, 1997-2011”, Department of Economics, Lund University Working Paper 2014:28. Abstract: We assess Lars E O Svensson’s prominent critique of the Swedish Riksbank. We reject his two major claims: first that the Riksbank has anchored inflation expectations at the 2 percent inflation target, and second, that the original version of the Phillips curve, based constant inflation expectations, is appropriate to calculate the unemployment effects of monetary policy. We find his conclusion that the Riksbank’s policy has contributed to an average of 38 000 more unemployed every year 1997-2011 misleading. We also show that the inflation targeting of the Riksbank 1995-2014 is successful compared to previous monetary regimes.
... The decreases (in percentage points) are subsequently subtracted from the increases to obtain balance figures. A directional questionnaire is used as directional changes have been found to be easier to predict than point values (Jonung, 1986 Finally, to study the cross-sectional variation in the pair-wise dynamic correlations, we introduce various distance measures. The geographic distance between two countries i and j (GEO ij ) is measured as the shortest distance (in hundred kms) between both capitals. ...
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The ongoing unification which takes place on the European political scene, along with recent advances in consumer mobility and communication technology, raises the question whether the European Union can be treated as a single market to fully exploit the potential synergy effects from pan-European marketing strategies. Previous research, which mostly used domain-specific segmentation bases, has resulted in mixed conclusions. In this paper, a more general segmentation base is adopted, as we consider the homogeneity in the European countries’ Consumer Confidence Indicators. Moreover, rather than analyzing more traditional static similarity measures, we adopt the concepts of dynamic correlation and cohesion between countries. The short-run fluctuations in consumer confidence are found to be largely country specific. However, a myopic focus on these fluctuations may inspire management to adopt multicountry strategies, foregoing the potential longer-run benefits from more standardized marketing strategies. Indeed, the Consumer Confidence Indicators become much more homogeneous as the planning horizon is extended. However, this homogeneity is found to remain inversely related to the cultural, economic and geographic distances among the various Member States. Hence, pan-regional rather pan-European strategies are called for.
... The most commonly used statistical models for the measurement of latent variables tend to give full consideration to the first component, downgrading the second psychological mechanism to a sort of random process generated by the sampling procedure. Nevertheless, several authors highlight that uncertainty should not be neglected when assessing a decision process (see, for example, Jonung 1986). ...
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... CPI inflation has varied between -2 and 4 percent; CPIF inflation, which is a key underlying inflation measure that the 24 See, for example, Regeringen (2016). 25 See Jonung (1986) for a study of the uncertainty of inflationary expectations held by the public in Sweden. Here the respondents state explicitly how uncertain they feel about their point or interval expectations. ...
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Inflation uncertainty
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