Models of Inflation Expectations Formation: A Comparison of Household and Economist Forecasts

Abstract

THE RECENT APPRECIATION of the critical role played by expectations of inflation in the behavior of macromodels has stimulated empirical studies of the formation of expectations by different groups. Time series survey data on expectations of inflation exist now for economists, households, and businesses. These data have been used as independent variables in explaining wage behavior (Gordon [16], Turnovsky and Wachter [34], and de Menil and Bhatta [5]), prices (Turnovsky and Wachter [34] and Wachtel [36]), interest rates (Gibson [14], Hendershott and Van Horne [19], Pearce [30], and Mishkin [27]), and consumption (Wachtel [36]), generally with a significant improvement in explanatory power. They have also been used as dependent variables in attempts to determine how expectations are formed by Gordon [15], Mullineaux [28], Jacobs and Jones [20], and Figlewski and Wachtel [9] for the economist survey, Van Duyne [35] for the household survey, and Leonard [23] and de Leeuw and McKelvey [4] for businesses. Given their different levels of knowlege of economics and perspectives, one might expect that the models used by the different groups to forecast inflation would