Are Consumer Expectations Forward-Looking: A Case for Pakistan Volume 28, Issue 2

Abstract

We have used the Dynamic Time Warping (DTW) algorithm to calculate the forward-looking consumer inflation expectation forward-lookingness. We have used DTW instead of widely used parametric techniques as this algorithm does not require specific assumptions relating to time series data. The results suggest that expectations are more backward-looking from 2012 to 2022. Furthermore, we examined consumers' response to the exchange rate regime shift and found evidence of consumers becoming more forward-looking due to the deliberate change in policy stance from fixed to managed float. This suggests that changes in economic policy can directly impact the consumer's expectations formation process.