Inflation Expectations in Albania: Rational or Not? Evidence from Surveys.

The important role of the inflation expectations channel for the monetary policy transmission mechanism enhances the necessity for a further analysis of their rationality. The inflation targeting regime requires a forward looking perspective - thus, inflation expectations turn to be an essential ingredient to success. The main objective of this study is to analyse the rationality of the Albanian economic agents' inflation expectations, over the period 2003Q2 - 2014Q2. All the qualitative data, obtained through surveys, will be quantified using different probability distribution approaches and balances. Empirical results for Albania confirm that while survey inflation expectations may not be highly accurate regarding inflation rates, they can still provide useful information on the direction of the short term inflationary pressures. Inflation expectations obtained through the consumers, businesses and financial agents surveys provide information on factors in the economic environment which can affect inflationary developments. The tests results confirm rationality of inflation expectations in some cases according to: agents; quantification methods; and mainly in the short term horizons. The rationality hypothesis is satisfied mainly when qualitative data are quantified assuming a uniform distribution function, original balances and in the very short term horizons. When expectations in one year horizon are considered, empirical results suggest that quantitative expectations are more rational then qualitative quantified ones. Expectations become less rational beyond a one-year horizon. In terms of rational forecasting, the empirical results suggest that the very low coefficient of inflation expectations might require a calibration at a higher level. [ABSTRACT FROM AUTHOR]