On the formation of inflationary expectations: Some empirical evidence from Finland, 1979–1980

Abstract

The results of a survey of inflationary expectations executed in 1979–1980 are reported. The respondents form one “informed” and one “uninformed” group. The purpose of the study are: (1) to test standard hypotheses on the formation of inflationary expectations, (2) to study the term structure of those expectations, (3) to study their dispersion among individuals, (4) to investigate the uncertainty in the formation of expectations. The results suggest that the adaptive expectations formation model works best for the uninformed group, while the extrapolative model is more satisfactory for the informed group. The lagged rate of unemployment was found to be a significant explanatory variable as well. Long-run inflationary expectations turned out to be very similar to short-run predictions, although the dispersion among individuals was greater in the former case. The uninformed respondents also expressed expectations with a greater dispersion than the informed respondents. The standard deviation of the expectations was quite stable over the observation period. The proxy used for subjective uncertainty also indicates a high degree of stability.