Inflation Forecasts : An Empirical Re - examination Swarna B . Dutt University of West Georgia

Inflation forecasts are an important part of modern day activist stabilization policy, and hence their accuracy and credibility is of vital importance. We examine the accuracy of these forecasts by testing for rationality in the expectation formation process using the Survey of Professional Forecasters data surveys of annual inflation forecasts. The non-stationarity of the actual and forecasted series allows for the application of cointegration techniques. We sequentially apply the Johansen Maximum Likelihood and the (recently available) Bieren Non-Parametric Cointegration tests. These techniques are complementary, and thus help strengthen our results. We find evidence indicating the presence of a cointegrating vector between the actual and forecasted series, which is evidence of the presence of rationality in the expectations formation process.