ON THE FORMATION OF EXPECTED INFLATION UNDER VARIOUS CONDITIONS - SOME SURVEY EVIDENCE

Based on the notion of economically rational expectations, I hypothesize 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 ARIMA model and those from a VAR model, respectively, as benchmarks for the weak and stronger measures of rationality. My analysis for 1978:01-1985:06 reveals evidence in favor of the above hypothesis.