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European Commission 2005

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Q13: How likely are you to buy a car? Q14: Are you planning to buy or build a home? ... more likely respondents are to buy a car, a house, or make home improvements, ... – PowerPoint PPT presentation

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Title: European Commission 2005


1
European Commission Directorate General Economic
and Financial Affairs
Quantified perceived and Expected Inflation in
the Euro Area How Incentives Improve Consumers
Inflation Forecasts
Presentation by Staffan LINDÉN Joint EC-OECD
Workshop on International Developments
of Business and Consumer Tendency Surveys 14-15
November 2005
European Commission 2005
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Purpose
  • Investigate whether differences in incentives to
    collect information can explain the gap between
    the perceived and expected inflation rates, and
    the official rate.
  • Inflation is in general perceived and expected to
    be higher than the official rate
  • Present the data

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Outline
  • Costly information and how strong incentives to
    form expectations improve projections
  • Data
  • Stylised facts from the qualitative data
  • Comparison of qualitative and quantitative data
  • Time series properties
  • Perceived and expected inflation when there are
    incentives to collect information
  • Conclusions

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Main message
  • Incentives to collect information on inflation
    induce respondents to produce inflation rates
    that are closer to the official rate.
  • It is important to ask questions that are
    relevant, and that respondents have the
    information necessary to give informed answers.
  • The answers to the quantitative questions behave
    in a similar way as the qualitative.
  • The dataset is becoming unique, almost 400,000
    observations just for the euro area

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The role of costly information
  • Hypothesis incentives to collect information on
    inflation induce respondents to produce inflation
    rates that are closer to the official rate.
  • There is a trade-off between informational
    efficiency and the incentives to acquire
    information.
  • It is costly to collect and process information
  • If respondents have no incentives to do so, they
    will not inform themselves.
  • This leads to noise in the indicators.

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Three survey questions inducing people to collect
information of inflation
  • Q13 How likely are you to buy a car?
  • Q14 Are you planning to buy or build a home?
  • Q15 How likely are you to spend any large sum
    of money on home improvements?
  • It is assumed that these activities gives
    respondents different incentives to obtain costly
    information.

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The Balance Statistic for perceived and 12 months
lagged expected inflation
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Stylised facts regarding the qualitative data
  • There are structural shifts in perceptions and
    expectations after 1 January 2002.
  • There is a de-linkage between perceived inflation
    and actual inflation.
  • Perceived inflation is over stated after January
    2002.
  • Perceptions have been converging towards the
    actual inflation rate.
  • Expectations are more in line with the actual
    inflation than perceptions after January 2002.

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Perceived and expected inflation in the euro area
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Stylised facts continued
  • Inflation perceptions and expectations fall as
    income increases.
  • Inflation perceptions and expectations fall as
    education increases.
  • Perceived inflation seems to increase with age,
    and expected inflation is hump-shaped.
  • Women perceive and expect higher inflation than
    men.

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Quantitative perceived and 12 month lagged
expected inflation rates
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12
What are the findings from the comparison
  • Quantitative data gives the same results as the
    qualitative.
  • The euro area data replicates the results
    obtained using other similar datasets.
  • There has been a convergence process going on.

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Perceived and expected inflation when incentive
to obtain information is different
  • The incentives are assumed to come from the
    purchase of a car, a house, or spending a large
    sum of money on home improvement
  • Figures to compare with
  • Overall perceived inflation is 11.6
  • Overall expected inflation is 6.1
  • Official HICP rate of inflation is 2.2

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Perceived inflation rates depending on likelihood
to buy or invest
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Expected inflation rates depending on likelihood
to buy or invest
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Results from incentive induced inflation
perceptions and expectations
  • The more likely respondents are to buy a car, a
    house, or make home improvements, the closer the
    reported inflation rate is to the official rate.
  • Perceptions respondents that are fairly likely
    are 0.9 p.p. to 2.4 p.p. below the not at all
    likely
  • Expectations respondents that are fairly
    likely are 0.9 p.p. below the not at all
    likely
  • The exceptions are for those respondents that are
    very likely to do so

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Adjusting for sample size
  • The relatively high inflation rates for the very
    likely are caused by outliers in the German
    data.
  • Small samples are over represented in the euro
    area aggregate.
  • Two combined solutions
  • Re-group the data into two categories
  • When calculating the euro area inflation rates,
    adjust for both country and sample size.

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Perceived inflation rates depending on likelihood
to buy or invest regrouped and weighted by size
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Expected inflation rates depending on likelihood
to buy or invest regrouped and weighted by size
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Results from incentive induced inflation
perceptions and expectations regrouped and
weighted by size
  • The more likely respondents are to buy a car, a
    house, or make home improvements, the closer the
    reported inflation rate is to the official rate.
  • Perceptions respondents answering likely are
    1.5 p.p. to 2.2 p.p. below the not likely
  • Expectations respondents answering likely are
    1 p.p. to 1.8 p.p. below the not likely
  • The levels are still above the official rates,
    but
  • for expectations the distance is almost halved.

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Conclusions
  • The quantitative data is of a high quality.
  • It behaves well according to the benchmark.
  • Incentives to obtain information on inflation
    improves the survey responses.
  • The expectations decline by as much as 1.8 p.p.
    (the overall rate falls from 6.1 to 4.3, which
    still is above the official rate of 2.2).
  • The gap to the official rate is thus partly
    explained

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Conclusions continued
  • It is important to ask questions that are
    relevant, and that respondents have the
    information necessary to give informed answers.
  • It can be useful to cut the data in different
    ways to improve the survey results.

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23
Relevance of the questions
  • For most questions in the harmonised
    questionnaires respondents have the information
    readily available.
  • For the questions on price developments, less so.
  • Different consumption baskets
  • Macro-variable that requires a lot of information
    to forecast
  • The more detailed the question, the more
    information is necessary

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Quantifying qualitative data
  • Three different methods are used
  • The Balance Statistic
  • The Carlson-Parkin Method
  • The probability approach
  • The Anderson Method
  • The regression approach

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Perceived inflation quantified by using the
Carlson-Parkin and the Anderson methods
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Expected inflation lagged 12 months, quantified
by using the Carlson-Parkin and the Anderson
methods
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Perceived and 12 month lagged expected inflation
- the Anderson method adjusted for the structural
break
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Correlations between perceived and expected
inflation, and actual inflation
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Comparison with other national datasets
  • The above mentioned stylised facts are present in
    similar datasets from the US and Sweden.
  • For income, education, and gender the results are
    the same.
  • It differs for age.

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Correlations between quantitative, qualitative,
and actual inflation
European Commission 2005
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