Inflation Expectations and Monetary Policy Surprises* (original) (raw)

Disagreement in Consumer Inflation Expectations

SSRN Electronic Journal, 2021

We posit that consumers form expectations about inflation by combining two sources of information: their beliefs from shopping experience and news about inflation they learn from experts. Disagreement among consumers in our model comes from four sources: (i) consumers' divergent prior beliefs, (ii) heterogeneity in their propensities to learn from experts, (iii) experts' different views about future inflation, and (iv) difference in mean expectations between consumers and experts. By carefully matching the datasets from the Michigan Survey of Consumers with the Survey of Professional Forecasters, we find that inflation expectations between households and experts differ substantially and persistently from each other, and households pay close attention to salient price changes, while experts respond more to monetary policy and macro indicators. Our empirical estimates imply economically significant degrees of information rigidity and these estimates vary substantially across households. This significant heterogeneity poses a great challenge for the canonical sticky-information model that assumes a single rate of information acquisition and for noisy-information model in which all agents place the same weight on new information received.

Inflation expectations in the euro area: are consumers rational?

Review of World Economics, 2010

In this paper, we propose a quantitative measure for inflation expectations based on consumer survey data. Thereafter, we proceed to testing the rationality assumption. This issue is of noteworthy interest in its own as it is commonly assumed in the theoretical modelling literature that the rational expectations hypothesis holds. This analysis is conducted for the euro area as a whole, as well as for several member countries, using a sample covering the last two decades. Moreover, we also assess if the conclusions hold when one focuses on the post-euro introduction period.

Inflation expectations and learning about monetary policy

2002

Various measures indicate that inflation expectations evolve sluggishly relative to actual inflation. In addition, they often fail conventional tests of unbiasedness. These observations are sometimes interpreted as evidence against rational expectations. The authors embed, within a standard monetary dynamic stochastic general-equilibrium model, an information friction and a learning mechanism regarding the interest-rate-targeting rule that monetary policy authorities follow. The learning mechanism enables optimizing economic agents to distinguish between transitory shocks to the policy rule and occasional shifts in the inflation target of monetary policy authorities. The model's simulated data are consistent with the empirical evidence. When the information friction is activated, simulated inflation expectations fail conventional unbiasedness tests much more frequently than in the complete-information case when this friction is shut down. These results suggest that an important size distortion may occur when conventional tests of unbiasedness are applied to relatively small samples dominated by a few significant shifts in monetary policy and sluggish learning about those shifts.

Understanding inflation expectations uncertainty in the euro area. Does psychology help?

2010

This study is motivated by the recent increase in volatility of both inflation and inflation expectations, triggered initially by the surge in commodity prices and more recently by the global economic crisis. Uncertainty about future inflation may pose a problem both for monetary policy and for economic efficiency at large. Our study shows that various strands of economic theory offer possible explanations for the mechanisms behind the formation of inflation expectations and uncertainty, spanning from extensions of the rational expectations model to behavioral economics theories. Our econometric estimations suggest that heuristics may indeed influence consumers’ inflation expectations uncertainty. For instance, consumers seem to invest more effort in forming expectations about future inflation if and when inflation developments become more salient. However, for very large inflation shocks this effect seems to be dampened by other behavioral features that may affect how agents form e...

Do Monetary Policy Announcements Shift Household Expectations?

Federal Reserve Bank of Dallas, Working Papers

We use a decade of daily survey data from Gallup to study how monetary policy influences households' beliefs about economic conditions. We first document that public confidence in the state of the economy reacts instantaneously to certain types of macroeconomic news. Next, we show that surprises to the federal funds target rate are among the news that have statistically significant and instantaneous effects on economic confidence. Specifically, we find that a surprise increase in the target rate robustly leads to an immediate decline in household confidence, at odds with previous findings that suggest consumers are largely inattentive to economic developments. Monetary policy news about forward guidance and asset purchases does not have similarly clear and robust immediate effects on household beliefs. We document heterogeneity across demographics in the responsiveness of macroeconomic beliefs to aggregate news, and we relate our findings to existing evidence on informational rigidities.

The anchoring of European inflation expectations

This paper analyses the usefulness of direct measures of consumers’ perceptions and expectations of inflation for monetary policy and investigates the degree to which these variables are anchored. We inter alia seek to xplore whether there is a difference in reaction of consumers in countries with more credible central banks and those from countries with less credible central banks. We moreover investigate whether the introduction of euro coins and banknotes in 2002, that can be interpreted as a structural shock, has significantly affected the inflation rate as perceived by consumers. We find that European inflation expectations are relatively robust to sudden changes in inflation or monetary policy surprises, regardless of the credibility of the central bank. The introduction of the euro, however, significantly affected the inflation perception of European consumers.

How Does Consumption Respond to News about Inflation? Field Evidence from a Randomized Control Trial

Social Science Research Network, 2019

We implement a survey of Dutch households in which random subsets of respondents receive information about inflation. The resulting exogenously generated variation in inflation expectations is used to assess how expectations affect subsequent monthly consumption decisions relative to those in a control group. The causal effects of elevated inflation expectations on nondurable spending are imprecisely estimated but there is a sharp negative effect on durable spending. We provide evidence that this is likely driven by the fact that Dutch households seem to become more pessimistic about their real income as well as aggregate spending when they increase their inflation expectations. There is little evidence to support the idea that the degree to which respondents change their beliefs or their spending in response to information treatments depends on their level of cognitive or financial constraints.

Failure at the Fed: A Study of the Determinants of Consumers' Inflation Expectations

2017

This paper utilizes data from Federal Reserve Economic Data (FRED) to investigate the determinants of consumers' inflation expectations. I employ a series of OLS models to test the effect of various goods' prices on consumers' inflation expectations, as measured by the Michigan Survey of Consumers, as well as the effects of monetary policy and previously observed inflation. My results indicate that energy prices have a positive statistically significant effect on consumers' inflation expectations, while previously observed inflation has no statistically significant effect. Furthermore, I find that adjustments to the federal funds rate and the recent implementation of inflation targeting do not appear to anchor consumers' inflation expectations. These findings suggest that the theory of rational expectations cannot be applied to consumers' inflation expectations.