New DTW Windows Type for Forward- and Backward-Lookingness Examination. Application for Inflation Expectation

Abstract

AbstractThis study provides an application of dynamic time warping algorithm with a new window constraint to assess consumer expectations’ information content regarding current and future inflation. Our study’s contribution is the novel application of DTW for testing expectations’ forward-lookingness. Additionally, we modify the algorithm to adjust it for a specific question on the information content of our data. The DTW overcomes constraints of the standard tool that examines forward-lookingness: DTW does not impose assumptions on time series properties. In empirical study we cover seven European counties and compare the DTW outcomes with the results of previous studies in these economies using a standard methodology. The research period covers 2001 to mid-2018. Application of DTW provides information on the degree of expectations’ forward-lookingness. The result, after standardization, are similar to the standard parameters of hybrid specification of expectations. Moreover, the rankings of most forward-looking consumers are replicated. Our results confirm the economic intuition, and they do not contradict previous studies.