Financial and Real Sectors' Inflation Expectations in Turkey : Evidence From Panel Data

We investigate rationality of financial and real sectors' CPI inflation expectations in Turkey by using multivariate panel cointegration method. Using panel techniques strengthened our empirical results by not only increasing sample size but also allowing heterogeneity across groups of respondents. Having found the expectations irrational in strict sense, we proceed to analyze the significance of both past and future inflation rates as determinants of agents' future inflation forecasts. Recursive estimates also show that forecasters' weight on future/target inflation rate versus past actual and expected inflation rates changes over time as unexpected shocks derail inflation from its disinflationary path. Lastly, we find asymmetry in expectations such that response of inflation expectations to increase in inflation rate is twice the size of the response to decrease in inflation rate. This may indicate long delays in restoring credibility of central banks after a positive shock on inflation rate