An evaluation of inflation expectations in Turkey

Abstract

Expectations of inflation play a critical role in the process of price setting in the market. Central banksclosely follow developments in inflation expectations to implement a successful monetary policy. TheCentral Bank of the Republic of Turkey (CBRT) conducts a survey of experts and decision makers in theŞnancial and real sectors to reveal market expectations and predictions of current and future inflation.The survey is conducted every month. This paper examines the accuracy of these survey predictionsusing forecast evaluation techniques. We focus on both point and sign accuracy of the predictions.Although point predictions from CBRT surveys are compared with those of autoregressive models, signpredictions are evaluated on their value to a user. We also test the predictions for bias. Unlike theempirical evidence from other economies, our results show that autoregressive models outperform mostof inflation expectations in forecasting inflation. This indicates that inflation expectations have poorpoint forecast accuracies. However, we show that sign predictions for all inflation expectations havevalue to a user.© 2017 Central Bank of The Republic of Turkey. Production and hosting by Elsevier B.V. This is an openaccess article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).