Expectation Formation Research Articles

When all we have is not enough: a search for the optimal method of quantifying inflation expectations

Although inflation expectations are pivotal variables for central banks, they are not directly observable. Therefore, central banks use qualitative survey results to proxy consumer expectations, and their quantification in this manner is often criticized. In this study, we investigate and identify an optimal quantification procedure for survey results based on a set of regression and probabilistic models. Specifically, we seek to identify the method that returns time series that are most highly correlated with an unbiased representative of survey-based expectation: balance statistics. We place additional constraints on this criterion to identify the procedure that returns expectations that are most closely related to consumer intentions (directional co-movements and forecast accuracy). Our sample covers the European Union member states over the period of January 2002 to June 2019. We also test a post-crisis subsample. Our results suggest that different procedures may be optimal for different economies, in line with previous findings on cross-country divergences of expectations formation. However, we find that the most applied assumption of normal distribution does not prove to be the best one. Our recommendation is to apply probabilistic procedures rather than regression methods.

The Formation of Inflation Expectations: Microdata Evidence from Japan

AbstractWe propose a novel approach for measuring inflation expectations, which can alleviate the rounding number problem. Furthermore, we examine how consumers form inflation expectations. We find that consumers heterogeneously update their information sets on prices; 46% of the consumers collect information about the consumer price index at least once a quarter, while the remaining consumers less frequently or never obtain this information. We also find that forecast revisions are sensitive to a change in food prices. More than half of consumers are attentive only to a change in food prices and may form their inflation expectations using food price changes as a signal of fluctuations in the overall inflation rates. The existence of consumers who are inattentive to aggregate inflation casts doubt on the transmission of monetary policy through the management of expectations.

Parental expectations of children’s higher education participation in Australia

AbstractThe role of parental expectations in determining children's higher education participation is important in understanding both participation and potential policy responses. Using a nationally representative longitudinal survey of Australian households, providing repeat observations on expectations for individual children, this study extends the literature in several respects. First, it examines the adaptation of parental expectations over a 4‐year time frame. Second, it looks at how parental expectations for school children are associated with actual higher education outcomes in the future. Third, the longitudinal aspect of the dataset permits more robust analyses of factors that shape parental expectations. The findings indicate that parental expectations of their children's attendance at university are generally stable across time. Perceptions of children's academic achievement at school are shown to be the key influence in shaping parents' expectations, and behavioural issues at school adversely affect expectations. Australian parents from non‐English‐speaking backgrounds were more likely to form positive expectations of university participation by their children, consistent with studies from other countries. A more nuanced picture of the formation of expectations for sole‐parent mothers is also presented. Positive effects of parental education and children's enrolment in a private school on parents' expectations, over and above any effect on school achievement, highlight these socioeconomic factors as potential causal channels for the intergenerational transmission of socioeconomic outcomes.

Expectation management of policy leaders: Evidence from COVID-19

This paper studies how the communication of political leaders affects the expectation formation of the public. Specifically, we examine the expectation management of the German government regarding COVID-19-related regulatory measures during the early phase of the pandemic. We elicit beliefs about the duration of these restrictions via a high-frequency survey of individuals, accompanied by an additional survey of firms. To quantify the success of policy communication, we use a regression discontinuity design and study how beliefs about the duration of the regulatory measures changed in response to three nationally televised press conferences by former Chancellor Angela Merkel and the Prime Ministers of the German federal states. We find that the announcements of Angela Merkel and her colleagues significantly prolonged the expected duration of restrictions, with effects being strongest for individuals with higher ex-ante optimism.

Assessing comfort in the workplace: A unified theory of behavioral and thermal expectations

Assessing comfort and predicting occupant behavior in the workplace has been a major topic within built environmental research. Despite the vast knowledge, several studies have reported a performance gap between the predicted and the actual behaviors in buildings, together with a discrepancy between predicted and reported comfort levels of occupants within the working environment. To close these gaps, the inclusion of human behavioral and perceptual theories has been investigated to understand the drivers leading to adaptive behaviors and occupants' comfort preferences. As a result, expectations are hypothesized playing a relevant role in the perception of comfort. However, little is known about the formation of expectations towards the indoor climate and the impact on adaptive behaviors. Therefore, drawing on psychological and comfort theories, we built a research framework to study occupants' expectations in buildings and their influence on comfort-related responses and behaviors. A structural equation model was empirically tested using survey data collected from office workers in Germany. Results showed that occupant's expectations positively influenced comfort and adaptive behaviors. Cognitive mechanisms, such as attitudes, perceived control, self-efficacy, personal norms and thermal history, were needed to capture expectations of the indoor environment. The relationship between the expected interaction with a fan to modify the indoor environment and the current occupant behavior was mediated by occupants' previous experiences with fans. This paper contributes to the assessment of comfort and occupant behavior literature by developing a theoretical framework of behavioral and thermal expectations in the built environment. Findings may have implications on the design of adaptive opportunities to enhance occupant satisfaction with the workplace and to support design strategies to reduce the building energy consumption.

Asymmetric loss and the rationality of consumers’ inflation forecasts: evidence from the US

ABSTRACT This study investigates asymmetric loss functions for 12-month-ahead inflation forecasts by consumers in the Survey of Consumer Expectations by the Federal Reserve Bank of New York. This study finds that older households are likely to produce higher inflation forecasts. Households with highest income and educational levels are likely to produce lower inflation forecasts. In contrast, households in various regions produce similar inflation forecasts. Further, inflation forecasts are generally over-predicted even they are evaluated against the regional inflation. These expectations are broadly rational with respect to households’ prospects of their earnings, income, and unemployment, and economy-wide stock prices and unemployment under asymmetric loss. However, they are not likely to be rational with respect to the past performances of inflation and their forecasts, and regional unemployment. The results suggest that demographic characteristics play an important role in expectations formation and macroeconomic consequences. These indicate that consumers are forward-looking that is consistent with standard macroeconomic models. However, difference in regional inflation is likely to play a minor role.

Yield curve reactions to fiscal sentiment in Brazil

PurposeUsing a fiscal sentiment indicator, this study aims to verify whether fiscal sentiment affects the yield curve in Brazil. Since policymakers highlight the coordination between monetary and fiscal policies and the importance of fiscal policy to the expectations formation process in inflation targeting regimes, the authors also explore the transmission mechanism through inflation expectations. Hence, the study also analyzes the effect of fiscal sentiment on interest rate swap spreads through the inflation expectations channel.Design/methodology/approachBased on information obtained from official communiqués about fiscal policies issued by the Central Bank of Brazil and the Brazilian Ministry of Finance, the study builds a fiscal sentiment indicator. The econometric strategy to verify whether fiscal sentiment is related to the short tail of the yield curve is based on time series analysis through ordinary least squares and generalized method of moments estimates. In turn, to estimate the transmission mechanism through inflation expectations, the model uses interaction terms between fiscal sentiment and inflation expectations.FindingsThe results suggest a more optimistic (pessimistic) fiscal sentiment reduces (increases) swap spreads. The findings reveal that improvements in fiscal credibility and a more optimistic fiscal sentiment are able to reduce the positive marginal effect that inflation expectations variations have on interest rate swap spreads.Originality/valueThis study contributes to the literature, as, to the best of authors’ knowledge, it is the first to analyze the content of the communiqués related to fiscal policy, and based on this content, it extracts the sentiment related to the fiscal environment and analyzes the effect of this sentiment on the yield curve. Besides, different from existing studies that analyze the effect of fiscal backward-looking aspects (such as public debt, budget balance, taxes and public spending) on the yield curve, this study investigates forward-looking aspects related to fiscal policy (such as fiscal credibility and fiscal sentiment).

Conditional effect of government debt on household debt

ABSTRACT How does government debt affect household debt? Capitalizing on a model of life-cycle economy populated by households with no bequest motive, this article shows that effect of government debt on aggregate household debt is conditional. If residence-service benefit of house is greater than equity-accrual benefit of house investment, government debt negatively affects household debt. If not, government debt positively affects household debt. This theoretical finding is tested with panel data of 53 countries over 1991–2019. Using system Generalized Method of Moments finds supportive evidence for the conditional effect, which remains robust after adopting external instrumental variable and alternative approach to expectation formation.

Macroeconomic dynamics under bounded rationality: on the impact of consumers’ forecast heuristics

This paper considers various types of forecast heuristics to examine the effects of boundedly rational agents on macroeconomic dynamics. Given the baseline New Keynesian model, we seek to find the expectation formation process that is most suitable in describing economic adjustments over the business cycle. In particular, impulse response analysis is used to compare the performances of the macroeconomic model under bounded rationality and under rational expectations. The results show that the fluctuations in consumer confidence mainly explain the degree of persistence in consumption. We conclude that a model under bounded rationality with a heuristic-induced switching process can qualitatively provide a good fit to the data that is equivalent to a model under rational expectations.

Pricing Process in Mexico: New Evidence on the Inflation Dynamics

We analyze the inflation dynamics in Mexico during inflation targeting period by a GMM estimate of the Hybrid New Keynesian Phillips Curve in its open and closed economy versions. We update and discuss previous results and expand the capacity of this tool to analyze inflationary dynamics by incorporating the exchange rate on labor costs. We find: a) robust evidence of adaptive and rational expectations; b) incorporating the exchange rate improves the inflation fit; c) this version of the Phillips Curve has strengthened since Great Recession, and e) expectations formation process changes during inflationary episodes according to the origin of shocks.

Understanding Consumer Inflation Expectations during the COVID-19 Pandemic.

We study how individuals' formation of inflation expectations are affected by the stringent containment and economic support measures put in place during the COVID‐19 pandemic. Using the New York Fed Survey of Consumer Expectations (SCE) and the Oxford COVID‐19 Government Response Tracker (OxCGRT), we find that policies aimed at containing the pandemic lead to an increase in individuals' inflation expectations and inflation uncertainty. We also find some heterogeneity in the impact across different demographic groups.

The life-span of population of the Irkutsk Oblast

The indicator of average life expectancy at birth is widely used as systemic indicator of population quality of life and health. The purpose of the study is to identify, to evaluate quantitative and structural changes of indicator of life expectancy at birth in population of the Irkutsk Oblast during 1990-2019. The data of life expectancy at birth was obtained from the Rosstat websites. The original calculations of survival tables were carried out using the databases of the Center for Demographic Research at the New Economic School. The analysis of trends was carried out using linear regression analysis. The analysis of role of exogenous and endogenous determination of mortality in formation of average life expectancy was carried out. In 1990-2005, in the Irkutsk Oblast, occurred change in ranking of causes of death that determined the greatest irrecoverable losses of population and reduction of indicator of average life expectancy at birth. The essence of this change is in abnormally high proportion of exogenous causes of mortality, especially class of external causes of mortality, in the structure of irreversible demographic losses. In the Irkutsk Oblast, in 2006-2019, occurred favorable changes in the structure of irrecoverable losses, testifying returning to modern type of mortality. During the same period, indicator of average life expectancy at birth increased. It is established that changes occurred since 2006 in the quantitative and structural indices of mortality and average life expectancy at birth are very positive. However, during demographic processes in 2020, the COVID-19 pandemic intervened. This factor is bringing negative impact on economy, and after that on social sphere and public health. The further course of development of social demographic situation in the Irkutsk Oblast, in particular, dynamics of indicator of average life expectancy at birth, will depend on success of activities of authorities of all levels in struggle with pandemic and overcoming crisis events in social economic development.

Disciplining expectations and the forward guidance puzzle

Forward guidance operates via the expectations formation process of the agents in the economy. In standard quantitative macroeconomic models, expectations are unobserved variables formed endogenously via the dynamics of the model and little scrutiny is devoted to analysing the behaviour of these expectations. We show that the introduction of survey and financial market-based forecast data in the estimation of the model disciplines the expectations formation process in DSGE models. When the model-implied expectations are matched to observed expectations, the additional information of the forecasts restrains the agents’ expectations formation. We argue that the reduced volatility of the agents’ expectations dampens the model reactions to forward guidance shocks and improves the out-of-sample forecast accuracy of the model. Furthermore, we evaluate the case for introducing a discount factor as a reduced form proxy for a variety of microfounded approaches, proposed to mitigate the forward guidance puzzle. Once data on expectations is considered, the empirical support to introduce a discount factor dissipates.

Learning and information transmission within multinational corporations

Firms face substantial uncertainty when doing business in new markets. We propose that multinational firms use “cross-market learning” to resolve such uncertainties. We develop a model of firm-level expectations formation with noisy signals from multiple markets and derive predictions on market entries and expectations formation over the firm’s life cycle. Using a novel dataset of Japanese multinational corporations that includes sales expectations of each affiliate, we provide supportive evidence for the model’s predictions. We find that firms rely on their performance in nearby markets to predict their profitability in a new market and make entry decisions. Such “cross-market” learning is less important after the firm has accumulated experience in the new market, but becomes more important if the uncertainty of the focal market is high or the firm has received more signals from the nearby markets.

Expectativas, Incerteza Econômica e Sentimento

ABSTRACT Objective: this article aims to help unravel if and how economic uncertainty interacts with the informational structure of sentiment. Methods: the empirical strategy is based on a non-linear and non-parametric causality test to investigate the interaction between variables as distributions. This article builds primarily on the literature on expectation formation. Results: it was found that uncertainty based on the media (ex-ante) precedes sentiment, at most, until the second moment of its distribution. In addition, sentiment helps predict the informational structure of fundamental uncertainty (ex-post) and higher order moments of ex-ante uncertainty. Conclusion: sentiment can be considered a channel for uncertainty through the tone of expectations and erroneous expectations. Ex-ante uncertainty measures can also help calibrate the rational cost-benefit calculation of attention by acting as a leading indicator of the increasing value of information.

Expectations Formation with Fat-Tailed Processes: Evidence from Sales Forecasts

Expectations Formation with Fat-Tailed Processes: Evidence from Sales Forecasts

Expectations Formation and Forward Information

Expectations Formation and Forward Information

Patient and Provider Perspectives on the Impacts of Unpredictability for Patient Sensemaking: Implications for Intervention Design.

Patients facing situations with significant unpredictability are met with challenges to expectation formation and preparation. One such context with unpredictable clinical outcomes is bone marrow transplant (BMT) for patients with hematologic malignancies. To understand the experience of unpredictability and opportunities for intervention, semi-structured interviews with patients who had received BMT (n = 7) and transplant providers (n = 8) were conducted. Thematic analysis revealed conflict between the necessity of expectation formation and the unpredictability of transplant. Providers described a tension between adequately informing patients of potential risks of transplant and presenting so much information as to create unnecessary anxiety in patients. Patients described issues with outcome unpredictability (not knowing what particular complications they would experience) and temporal unpredictability (not knowing when complications would appear). Patients struggled to make sense of unexpected complications and resulting limitations post-BMT and plan for the future amid the nonlinear recovery timeline. The challenges of unpredictability warrant a support solution that enables patient sensemaking in their evolving illness journey and facilitates adaptation to new circumstances.

Identifying the Source of Information Rigidities in the Expectations Formation Process

Coibion and Gorodnichenko (2015) provide a useful framework to test the null hypothesis of full-information rational expectations against two popular classes of information rigidities, sticky information (SI) and noisy information (NI). However, the observational equivalence of SI and NI in average forecast errors gives no power in the test for one against the other. We identify the source of information rigidities by estimating the equations for the average forecast errors and variance of forecasts. The results show the importance of both SI and NI, but favor a type of NI in which agents quickly learn the underlying state.

Thompson Sampling: A Behavioral Model of Expectation Formation for Economics

Thompson Sampling: A Behavioral Model of Expectation Formation for Economics