Do Inflation Expectations Granger Cause Inflation? A VEC Model Approach

Sammanfattning: Being able to accurately predict future inflation is of great importance for a wide range of actors in the economy, as well as for the effectiveness of monetary policy decisions. In this thesis, we examine whether survey measures of inflation expectations contribute to more accurate inflation forecasts in Sweden. This is done by conducting forecasts using data between 2002Q1-2018Q1. Forecasts from two benchmark models, a univariate ARIMA model and a trivariate VAR model, are compared to three VEC models each - including the aggregated mean of inflation expectations as surveyed by NIER of both genders, men, and women, respectively. We find that the models including inflation expectations are all outperformed by the benchmark models, implying that none of the expectations series contribute to more accurate inflation forecasts in Sweden. However, our results suggest that the models including inflation expectations exhibit time varying performance and that it is beneficial to integrate expectations into specific models during certain time frames.