Quantification of Expectations. Are They Useful for Forecasting Inflation?

Abstract

Business tendency surveys are commonly used to provide estimations of a wide range of macroeconomic variables before the publication of official data. The qualitative nature of data on the direction of change has often led to quantifying survey results making use of official data, introducing a measurement error due to incorrect assumptions. Through Monte Carlo simulations it is possible to isolate the measurement error introduced by incorrect assumptions when quantifying survey results. By means of a simulation experiment we check the effect on the measurement error of respondents diverging from "rationality". We also analyse the predictive performance of different quantification methods for fourteen EU countries and the euro area. We find that allowing for asymmetric and stochastic response thresholds (indifference interval) produces a lower measurement error and more accurate forecasts.