Heterogeneous inflation expectations, learning, and market outcomes

Research English OPEN
Madeira, Carlos ; Zafar, Basit (2012)
  • Publisher: New York, NY: Federal Reserve Bank of New York
  • Subject: C53 | C81 | E31 | E37 | D83 | D84 | inflation expectations | imperfect information | heterogeneous expectations | learning | sticky information | Inflationserwartung | Unvollkommene Information | Lernprozess | Soziale Schicht | Sch├Ątzung | USA
    • ddc: ddc:330

Using the panel component of the Michigan Survey of Consumers, we show that individuals, in particular women and ethnic minorities, are highly heterogeneous in their expectations of inflation. We estimate a model of inflation expectations based on learning from experience that also allows for heterogeneity in both private information and updating. Our model vastly outperforms existing models of inflation expectations in explaining the heterogeneity in the data. We find that women, ethnic minorities, and less educated agents have a higher degree of heterogeneity in their private information, and are also slower to update their expectations. In addition, we show that personal income forecasts are positively related to subjective inflation expectations. During the 2000s, consumers believe inflation to be more persistent in the short term, but temporary fluctuations in inflation have less effect on income and long-term inflation expectations. Finally, we find evidence that sticky expectations and the heterogeneity of new information received by consumers generate higher mark-ups and inflation.
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