Determinants of disagreement: Learning from inflation expectations survey of households

Abstract

AbstractFor efficient conduct of monetary policy, the central banks need to manage inflation expectations. Disagreement is a measure of how well inflation expectations are anchored. Thus, for effective management of inflation expectations, identifying the determinants of disagreement and understanding the process of its formation are crucial. In this paper, we present an empirical analysis of the households inflation expectations survey data conducted by the Reserve Bank of India. Our findings are as follows: (i) The disagreement is highly persistent; (ii) the households' inflation forecasts depend on their day to day purchasing experiences; (iii) in high inflation periods, they tend to overpredict; (iv) inflation targeting seems to reduce disagreement; and (v) the gender and age of the agents seem to have an effect on disagreement. Finally, contrary to the findings in developed economies, we observe a negative correlation of disagreement with inflation. We provide a theoretical explanation for it supported with an empirical analysis.