Formation Of Inflation Expectations Research Articles

Factors in the Formation of Inflation Expectations as Recorded in the Russian National Survey of Consumer Finance

Factors in the Formation of Inflation Expectations as Recorded in the Russian National Survey of Consumer Finance

News Selection and Household Inflation Expectations

We examine the impact of systematic media reporting on household inflation expectations, focusing on how selective news coverage influences household responses to inflation news. In a model where monitoring all economic developments is costly, households will account for news selection when forming inflation expectations. The model implies an asymmetry: news about high inflation influences inflation expectations more than news about low inflation. Using micro panel data, we find support for this hypothesis. Exposure to news about higher prices increases household inflation expectations by approximately 0.4 percentage point, whereas exposure to news about lower prices has no discernible effect.

Investigation of Expected Inflation According to Adaptive Expectations Hypothesis Using Koyck Transformation: A Study on Türkiye

Inflation expectations have been researched theoretically and practically for more than a century and continue to be a favorite research topic for economists even today. The validity of the Rational Expectations Hypothesis has not yet been proven by empirical research, and many studies show that it is invalid. This situation drew attention again to the validity of the Adaptive Expectations Hypothesis. In this study, inflation expectations for Türkiye in the 2013m6-2023m7 period, under the assumption of the Adaptive Expectations Hypothesis, were tested first by applying the Nerlove (1958) model and secondly by applying the Koyck transformation within the framework of the Friedman-Cagan model. As a result of the study, although evidence was found that the Adaptive Expectations Hypothesis is valid in Türkiye according to the Nerlove (1958) model, it was observed that there was a weak relationship between actual inflation and expected inflation. The second model was applied to avoid hesitation in accepting the hypothesis. With the Koyck transform model, it has been determined that individuals in Türkiye learn from past inflation values in forming inflation expectations. The speed of this learning is 77%. It was concluded that individuals form their inflation expectations by using 77% of current and past inflation data. The intended history includes the current period, the first and second lags. In terms of expectations, the effect of the third lag is zero.

Inflation-overshooting commitment: an analysis using a macroeconomic model

Abstract This article examines the effectiveness of the makeup strategy for Japan’s economy, where inflation expectations formation is known to be largely adaptive. We build a small-scale macroeconomic model and conduct simulation analysis to study the implications of adopting the makeup strategy for early achievement of the inflation target and the incurring costs. Simulation results show that when the inflation rate has been below the target, it is effective to stabilize average inflation by offsetting the past inflation misses over some makeup windows and that when the natural rate of interest is lower, the optimal makeup window becomes longer.

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.

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.