Browsing by Author "Crowther-Ehlers, Nelene"

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    Inflation expectations in South Africa : non-rational, intertemporal and idiosyncratic heterogeneity represented by a term structure approach
    (Stellenbosch : Stellenbosch University, 2019-12) Crowther-Ehlers, Nelene; Du Plessis, Stanislaus Alexander; Stellenbosch University. Faculty of Economic and Management Sciences. Dept. of Economics.
    ENGLISH SUMMARY : A key factor in the inflation-targeting regime is the psychological process by which decision makers form their expectations of future inflation. Economic models often assume that on aggregate, decision makers form inflation expectations uniformly and rationally, that is, without bias or informational inefficiencies. These assumptions of rational, homogenous expectations formation are computationally convenient and allow for important model simplifications. From a monetary policy perspective, it is important to analyse and test these assumptions, since under full rationality, only unexpected changes in inflation will affect the real economy. Departures from homogeneity require monetary authorities to understand the nature of expectations formation so that the appropriate policy can be prescribed. In this study, data from both the Bureau for Economic Research (BER) Inflation Expectations Survey and the Reuters Inflation Expectations (RIE) Survey were evaluated over different forecasting horizons to assess the validity of these assumptions across different economic groups in South Africa. This study investigates factors that likely underlie the actual decision rules whereby decision makers formed inflation expectations during the inflation targeting regime in South Africa. The results reported did not support the hypothesis of exclusively rational expectations, mainly due to the respondents’ inefficient use of available information. However, the respondents were not passive or inattentive, since they did observe and respond to certain influences, though heterogeneously and mainly in the short-term. Heterogeneity was observed across different survey groups when considering adaptive behaviour, information diffusion, perceived influence of external shocks and learning behaviour. Intertemporal heterogeneity - the differences in the processes that appear to govern expectation formation at short-term horizons compared to longer-term horizons - stands out. Multiple focal points (digit preferencing) were observed in the distribution of the survey data and together with the associated heterogeneity can complicate traditional estimation approaches. Particular attention was given to potential influences on longer-term perceived inflation expectations of the respondents to assess the heterogeneity between groups and also if these were anchored. Conventional regression analyses supported this evaluation as well as a state-space Kalman filter approach to estimate the term structure of inflation expectations. The latter was based on the Nelson-Siegel (1987) methodology for term structure estimation to estimate the perceived longer-term anchor of the respondents. None of the approaches used in this study to approximate longer-term inflation expectations provided estimates close to the midpoint of the inflation target range for any of the three BER survey groups analysed. These estimates were instead mostly clustered around the upper end of the target range. A richer specification of South African inflation expectations formation is therefore proposed that sufficiently represent both the short- and longer-term data generating processes involved in forming inflation expectations, based on the observed non-rationality, multiple forms of heterogeneity and multi-modal distributional characteristics shown in the study presented in this thesis. Term structure analyses provide a robust, flexible and encompassing framework for facilitating a parsimonious representation of both short- and longer-term inflation expectations in South Africa and are suggested for empirical inflation expectations modelling frameworks.