Directional analysis of consumers’ forecasts of inflation in a small open economy: evidence from South Korea |
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Authors: | Young Bin Ahn Yoichi Tsuchiya |
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Institution: | 1. Research Institute of Economics and Management, Southwestern University of Finance and Economics, Chengdu, Sichuan, P.R. China;2. School of Management, Tokyo University of Science, Kuki, Saitama, Japan |
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Abstract: | We evaluate the directional accuracy of consumers’ forecasts of inflation in predicting the movement of the actual CPI in a small open economy. In order to do so, we use a method developed by Pesaran and Timmermann (2009), based on South Korean data. By illustrating an application of the new market-timing test, we show that consumers’ expectations of inflation are not a useful predictor of the CPI in South Korea. Our findings suggest that the directional accuracy of consumers’ 1-year-ahead forecasts of inflation is not affected by the inflation targeting of the Bank of Korea. Our findings also suggest that consumers’ 1-year-ahead forecasts of inflation are scattered away from the Bank of Korea’s inflation target. |
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Keywords: | Directional analysis consumers’ inflation forecasts CPI small open economy survey data |
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