Formation Of Inflation Expectations Research Articles

Consumption categories, household attention, and inflation expectations: Implications for optimal monetary policy

What inflation measure should central banks target? This paper highlights a mechanism where monetary policy optimally targets headline inflation if households pay limited attention to different consumption categories when forming inflation expectations. This result stands in contrast to standard rational expectations models, where optimal policy targets core inflation. The core inflation rate excludes volatile energy and food prices (non-core) from headline inflation. Using novel survey data on inflation expectations for disaggregated consumption categories, I find household expectations are disproportionately driven by beliefs about future non-core prices. A model of bounded rationality accounts for the empirical evidence. While forming inflation expectations, households pay more attention to the volatile non-core components. Embedding this framework into a multi-sector New Keynesian model, I show that targeting headline rather than core inflation provides welfare gains.

Firms’ Inflation Expectations: New Evidence from France

Abstract Using a new survey of firms’ inflation expectations in France, we provide novel evidence about the measurement and formation of inflation expectations on the part of firms. First, French firms report inflation expectations with a smaller, but still positive, bias than households and display less disagreement. Second, we characterize the extent and manner in which the wording of questions matters for the measurement of firms’ inflation expectations. Third, we document whether and how the position of the respondent within the firm affects the provided responses. Fourth, because our survey measures firms’ expectations about aggregate and firm-level wage growth along with their inflation expectations, we can show that expectations about wages are even more condensed than firms’ inflation expectations and almost completely uncorrelated with them, indicating that firms perceive little link between price and wage inflation. Finally, an experimental treatment indicates that an exogenous change in firms’ inflation expectations has no effect on their aggregate wage expectations.

Peculiarity of Behavior of Economic Agents under Cognitive Constraints in a Semi-Open New Keynesian Model

The aim of the paper is to analyze changes and peculiarities of behavior of economic agents with bounded rationality in the New Keynesian model, in which imported equipment and technology are one of the factors of production, and households consume only domestic products. The formation of output gap and inflation expectations by agents is based on stationary values of these variables and on extrapolation of the latest available data on inflation and the output gap. The weight shares of agents applying these rules change endogenously. Histograms of the frequency distribution of the degree of buoyancy and the impulse responses of monetary policy shocks and technology shocks to the variables under study show that a less open economy tends to go through an economic cycle with a smaller amplitude than a more rigid economy. Analyses of the trade-offs between the volatility of inflation and the output gap at different parameter values in the Taylor rule show their non-linear nature (in contrast to standard models with rational expectations). An important result obtained in this analysis is that the rational expectations hypothesis is more consistent with a closed economy than with an open one.

Does Economic Literacy Affect Inflation Expectations? An Experimental Survey Approach

This study investigates the effectiveness of the information treatment in the inflation expectations on individuals with varying levels of economic literacy. In this regard, we conducted an experimental survey that provided participants with information related to inflation and other macroeconomic variables. The study reveals that the information treatment was effective in assisting the participants revise their expectations closer to actual inflation. Notably, this was especially effective for those without an economics background as they revised it to align with the actual inflation. Additionally, we found that formal economics learning is insignificant in the formation of inflation expectations given that the relevant information is accessible. Results of the study shed light on the importance of addressing information friction, focusing on financial education and effective communication from central banks.
  

Formation of Inflation Expectations: An Analysis in terms of Behavioral Economics

Enflasyon bekleyişleri gerçek enflasyonun önemli bir belirleyicisi olduğundan para politikasının yürütülmesinde önemli bir rol oynamaktadır. Merkez bankaları, iktisadi birimlerin enflasyon bekleyişlerini kontrol ederek enflasyon hedefiyle uyumlu olması için çabalamaktadır. Bu uyumun gerçekleşmesi durumunda merkez bankaları enflasyondaki dalgalanmaları daha rahat yönetebilme olanağına sahip olmakta ve enflasyonu kontrol etmede daha başarılı sonuçlar elde etmektedirler. Enflasyon bekleyişleriyle ilgili olarak ana akım iktisatta temel paradigma rasyonel bekleyişler hipotezidir. Bu hipoteze göre iktisadi birimler var olan tüm bilgiden yararlanarak bekleyişlerini oluşturmakta ve enflasyon konusunda optimal tahminlerde bulunmaktadırlar. Rasyonel bekleyişlere dayalı olarak enflasyon tahminleri yapılırken üstelik bilginin homojen dağıldığı ve bu bilgiyi sınırlayan psikolojik faktörlerin de aynı olduğu kabul edilmektedir. Fakat davranışsal iktisat alanında yapılan çalışmalar, enflasyon tahminlerini çevreleyen eksik bilginin ve belirsizliğin önemini ve enflasyon konusunda tutulan inançların zamanla değişebilmesini, dolayısıyla heterojenliği, temel alarak rasyonel bekleyişler hipotezine eleştiriler getirmişlerdir. Bu eleştirilerin sonucunda enflasyon bekleyişlerinin oluşumunu açıklamada alternatif davranışsal yaklaşımlar geliştirilmiştir. Bu yaklaşımların en önemlileri yapışkan bilgi modeli, rasyonel dikkatsizlik yaklaşımı, epidemiyolojik bekleyişler modeli ve Bayesyen öğrenme modelidir. Bu kapsamda çalışmanın temel amacı teorik ve ampirik literatür temelinde enflasyon bekleyişlerinin gerçek yaşamda, rasyonel bekleyişlerden farklı olarak, nasıl oluştuğunu davranışsal iktisat bağlamında ortaya koymaktır. Çalışmada enflasyon bekleyişlerinin, bireysel davranışlardaki heterojenliğin sonucu olarak, rasyonel bekleyişler hipotezine aykırı biçimde oluştuğu, davranışsal iktisadın enflasyon bekleyişlerinin oluşumunu farklı psikolojik yaklaşımlar ile açıklayarak merkez bankalarına hem fiyat istikrarını sağlamada hem de etkin bir para politikası izlemede önemli bir katkı sağladığı sonucuna ulaşılmıştır. Çalışma enflasyon bekleyişlerini rasyonel bekleyişler yaklaşımına göre açıklayan modellerdeki eksikliği ortaya koyarak bu eksikliği gidermede davranışsal yaklaşımların önemini ortaya koymuştur.

An Estimated Model of Household Inflation Expectations: Information Frictions and Implications

Abstract This paper proposes and estimates a dynamic model of household inflation expectations with information frictions and time-varying parameters, where households use a Bayesian learning model to form and update inflation expectations. The model decomposes households' inflation expectation formation process into a learning component, a noisy signal component, and a measurement component. Model-implied household inflation expectations provide a robust fit for the expectation-augmented Phillips curve. As a result of time-varying inflation dynamics, households' attention to inflation is endogenous to its volatility. This insight offers explanations for the anchoring of inflation expectations during the Great Moderation.

Information and the Formation of Inflation Expectations by Firms: Evidence from a Survey of Israeli Firms

Information and the Formation of Inflation Expectations by Firms: Evidence from a Survey of Israeli Firms

Information and the Formation of Inflation Expectations by Firms: Evidence from a Survey of Israeli Firms

Information and the Formation of Inflation Expectations by Firms: Evidence from a Survey of Israeli Firms

ИССЛЕДОВАНИЕ ИНФЛЯЦИОННЫХ ОЖИДАНИЙ РОССИЙСКОГО НАСЕЛЕНИЯ В УСЛОВИЯХ САНКЦИЙ НА ОСНОВЕ БОЛЬШИХ ДАННЫХ

In 2022, Russian economy faced unprecedented sanctions pressure from the Western countries. Against this background, the government and the Central Bank need to constantly monitor the economic situation in the Russian Federation in order to take timely and effective measures. A high-frequency indicator of inflation expectations based on big data can help in solving this problem. The author identifies significant shortcomings of the existing approaches to the assessment of inflation expectations that make the possibility of their application under sanctions questionable. Based on the developed high-frequency indicators of inflation expectations, sanctions concern and the frequency of sanctions mentioning in the context of inflation expectations, she analyzes the impact of sanctions on the inflation expectations of the Russian population. The method of assessing inflation expectations based on big data has proved effective under sanctions and demonstrated the impact of sanctions on forming inflation expectations of the Russian population.

IQ, Expectations, and Choice

Abstract We use administrative and survey-based micro data to study the relationship between cognitive abilities (IQ), the formation of inflation expectations, and the consumption plans of a representative male population. High-IQ men display 50 $\%$ lower forecast errors for inflation than other men. High-IQ men, but not others, have consistent inflation expectations and perceptions over time. In terms of choice, only high-IQ men increase their consumption propensity when expecting higher inflation as the consumer Euler equation prescribes. Education levels, income, other expectations, and socio-economic status, although important, do not explain the variation in expectations and choice by IQ. Recent modelling attempts to incorporate boundedly rational agents into macro models do not fully capture all the facts we document. We discuss which dimensions of expectations formation and choice are important for heterogeneous-agents models of household consumption and for the transmission of fiscal and monetary policy.

Disagreement in Consumer Inflation Expectations

AbstractBy carefully matching the data sets from the Michigan Survey of Consumers with the Survey of Professional Forecasters, we show that there exists substantial heterogeneity in the propensity of U.S. households to learn from experts in forming inflation expectations. Additional results for a group of European economies broadly confirm this observation. We advance an extended version of the sticky‐information model to analyze disagreement in consumer inflation expectations. Besides differences in consumers' propensities to learn, disagreement in our model arises from heterogeneity in consumers' fundamental inflation and past expectations and experts' different views about future inflation.

Monetary Policy Uncertainty and Inflation Expectations*

AbstractDo inflation expectations react to changes in the volatility of monetary policy? They have, but only until the global financial crisis. This paper investigates whether increasing the dispersion of monetary policy shocks, which is interpreted as elevated uncertainty surrounding monetary policy, affects the inflation expectation formation process. Based on US data since the 1980s and a stochastic volatility‐in‐mean structural VAR model, we find that monetary policy uncertainty reduces both inflation expectations and inflation. However, after the Great Recession this link has disappeared, even when controlling for the Zero Lower Bound.

The Role of the Media in the Inflation Expectation Formation Process

This research highlights the role played by the media in the formation of inflation expectations among various respondents in Ukraine. Using a large news corpus and machine-learning techniques, I have constructed newsbased metrics that produce quantitative indicators for texts, which show if the news topics are relevant to inflation expectations. I have found evidence that various news topics may have an impact on inflation expectations, and can explain part of their variance. Thus, my results could help in the analysis of inflation expectations – which is of value, given that anchoring inflation expectations remains a key challenge for central banks.

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.

Sales and promotions and the great recession deflation

This paper investigates the effect of sales and promotions on the pricing decisions of firms by providing a novel theoretical model where firms face price adjustment costs and offer items on sale to attract bargain hunters. It is demonstrated that in a recession, the frequency of items on sale increases as well as the effort of consumers to locate such offers. Since the decrease in the cost of living following a recession comes both from price decreases and the combination of more frequent sales and more active bargain hunting by consumers, a price index that simply focuses on prices and neglects high-frequency sales and their weight in the consumer’s basket appears to be less responsive to shocks. This can explain the low response of inflation in the post-crisis period and thus the breakdown of the Phillips curve as sales items is under-represented in common price indexes. This study also shows that a price index created by placing more weight on sale items in the UK CPI correlates better with the output gap, confirming the model’s predictions. Additionally, if agents form inflation expectations using indices that neglect sales and promotions, recessions are exacerbated.

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.

Alternative monetary-policy instruments and limited credibility: An exploration

We evaluate the dynamics of a small and open economy under simple rules for alternative monetary-policy instruments, in a model with imperfectly anchored expectations. The inflation-targeting consensus indicates that interest-rate rules are preferred, instead of using either a monetary aggregate or the exchange rate as the main instrument; with arguments usually presented under rational expectations and full credibility. In contrast, we assume agents use econometric models to form inflation expectations, capturing limited credibility. We compare the dynamics after a shock to external-borrowing costs (arguably one of the most important sources of fluctuations in emerging countries) under three policy rules: a Taylor-type rule for the interest rate, a constant-growth-rate rule for monetary aggregates, and a fixed exchange rate. The analysis identifies relevant trade-offs in choosing among alternative instruments, highlighting specially the role of exchange-rate volatility in shaping medium- and long-term inflation forecasts, and its consequences for policy design.

Sticky-information in forming inflation expectations

Inflation expectation plays an important role in macro-economy, and the stickiness of information is critical for the management of inflation expectations. This paper tries to provide supportive evidence of sticky-information in forming inflation expectations in three significant economies, i.e., China, Eurozone, and the United States. Based on the epidemiology model, our results show that the stickiness in China is smaller than that in Eurozone and the United States. (JEL: E31, E52, E58, D84)

Households\u2019 inflation perceptions and expectations: survey evidence from New Zealand

In this paper, we study how inflation is viewed by the general population of New Zealand. Based on unique representative survey data collected in 2016 and using descriptive statistics and multivariate regressions, we explore various aspects of how laypersons perceive inflation and form inflation expectations. We focus on how an individual’s economic situation, information search and interest in inflation, economic knowledge, and attitudes and values are related to inflation perception and expectation, as well as the individual’s reaction to them. We interpret our findings as a clear indication that laypersons’ knowledge about inflation is much better described by the imperfect information view prevailing in social psychology than by the rational actor view typically assumed in economics.

Consumer inflation expectations, income changes and economic downturns

SummaryUsing a novel, nationally representative dataset containing the expectations of over 300,000 Australians, individuals are shown to form expectations in a manner inadequately explained by popular expectation mechanisms. Approximately one in five individuals form inflation expectations that are negatively related to their own‐income changes, even after accounting for their level of optimism regarding future economic conditions and their observation of economic news. These individuals are more likely to be engaged in manual labour and to be on lower income brackets. The inflation expectations of such individuals rise, even as Phillips curve predictions of inflation fall. The findings are particularly important for inflation dynamics during economic downturns when large numbers of consumers are likely to heavily increase their inflation expectations, potentially resulting in large inflation surprises.