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Measuring Unobserved Expected Inflation
Author(s) -
Melnick Rafi
Publication year - 2016
Publication title -
international finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.458
H-Index - 39
eISSN - 1468-2362
pISSN - 1367-0271
DOI - 10.1111/infi.12080
Subject(s) - economics , inflation (cosmology) , econometrics , monetary policy , real interest rate , measure (data warehouse) , market liquidity , kalman filter , normalization (sociology) , monetary economics , computer science , mathematics , statistics , physics , database , sociology , theoretical physics , anthropology
The aim of this study is to develop an eclectic but robust model that allows for a better measure of expected inflation and facilitates testing for all sorts of biases. Improving the measure of expected inflation is of critical importance for conducting monetary policy. In many circumstances, indicators of expected inflation move in opposite directions, and this divergence may be critical for the setting of the interest rate. I estimate the model for a special set of Israeli data via the Kalman filter methodology and then test for systematic biases, a better normalization of the model, liquidity problems and inflation risk – which could all be present in current measures of expected inflation.