On the Formation of Expected Inflation under Various Conditions: Some Survey Evidence

Based on the notion of economically rational expectations, the author hypothesizes that the degree of the rationality of economic agents' inflationary expectations differs depending on the prevailing rate and volatility of inflation. This is tested for the Institute for Social Research monthly survey data by using the inflation forecasts from an autoregressive integrated moving average model and those from a vector autoregressive model, respectively, as benchmarks for the weak and stronger measures of rationality. The author's analysis for 1978:01-1985:06 reveals evidence in favor of the above hypothesis.