The heterogeneity of inflation expectation: An empirical analysis based on optimal information acquisition

Abstract

This paper firstly estimates the inflation expectation of households by improved probability method and then estimates the inflation expectation of experts by VAR(2) Model. Based on these two estimations, we find that expert expectation has a higher precision but it does not act in a rational way as household expectation acts. There is a bi-directional Granger Causality link between households’ expectation and actual inflation. But the expert expectation is only the Granger reason of actual inflation. There is an obvious feedback mechanism between the inflation of household and expert. This heterogeneity of inflation may be the result of optimal information acquisition during the formation of private sector’s expectation.