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Volume :28 Issue : 104 2002      Add To Cart                                                                    Download

EX ANTE INFLATION RATES INTHE UNITED ARAB EMIRATES (UAE)

Auther : By: Dr. Mouawiya M. Al-Awad

This paper provides a measure of the expected inflation rate for the United Arab Emirates using the nominal term structure of interest rate.  This measure is superior to other measures of expected inflation in two main aspects: it is consistent with economic theory and it incorporates all information available to the investor at the time of forecasting.  Two term structures of the interest rates are used in the paper using monthly nominal interest rates in the UAE. They provide an identical measure of expected inflation rate in the long run.  It seems that the public over-predicted inflation during the period 1996 (1) to 1997 (6), but under-predicted inflation for the period 1997 (7) to 1998 (12).

Introduction and Literature Review:

Effort to find a suitable measure of expected inflation dates back to Irving Fisher (1930) when he proposed the use of an autoregressive measure of expected inflation that depends on current and past values of the actual inflation rates.  Then, Cagan (1956) developed the adaptive expectation hypothesis in which the expected inflation is equal to a weighted average of the current and the most recent expectation of the inflation rate.  Throop (1988) evaluated the performance of three alternative measures of inflationary expectations: a purely autoregressive measure that depends only on past and current values of inflation: an augmented autoregressive measure that depends on current and past values of inflation and on current and past values of other variables.

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