Rationality of inflation expectations in a financially repressed economy
Author
Başçı, Erdem
Advisor
Togan, Subidey
Date
1990Publisher
Bilkent University
Language
English
Type
ThesisItem Usage Stats
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Abstract
This study attempts to assess the quality of p u b l i c ’s
expectations of inflation by investigating the dynamic
interactions between money, prices, income and interest rates in
Turkey. Four alternative hypotheses on public expectation
formation rule are proposed and tested in the context of the same
real money balances model. The fact that interest rates were not
determined by the market forces in the investigated period
provides sufficient volatility in the real interest rates, and
hence reduces the confidence bands of the estimates of the
interest sensitivity parameter of the real money demand function.
The estimation of parameters and tests of hypotheses are carried
out on restricted and unrestricted vector-autoregressive
representations of the time series of four economic variables,
namely growth rates of money, prices, output and interest rates.
Out of sample forecasts are also carried out and compared. Most
of the results are in favor of the adaptive and less informed
expectations hypothesis rather than rational or more informed
ones
Keywords
Rational expectationsmoney demand function,
v e c t o r - a u t o r e g r e s s i o n
s t a t i o n a r i t y
cross-equation r e s t r i c t i o n s