Memories of high inflation (original) (raw)
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SSRN Electronic Journal
An experiment using a representative survey of the German population shows that letting respondents report a number rather than asking them to choose from a list of predefined ranges lowers the response rate for both perceived past and expected inflation and decreases (increases) reported past (expected) inflation. Income, education, gender, objective and subjective knowledge about monetary policy, and political affiliation affect the effect's size but not its sign. East and West German respondents who were 15 or older when the Berlin Wall fell have reactions different from those who were younger at that time, which supports the 'impressionable years' hypothesis based on different inflation experiences.
Policy Preferences and Policy Makers' Beliefs: The Great Inflation
Macroeconomic Dynamics
The literature has proposed two potential channels through which monetary policy played a role in the Great Inflation in the United States. One approach posits that the Federal Reserve held misperceptions of the economy. An alternative explanation contends that policy makers shifted preferences from an output gap stabilization goal toward inflation stabilization after 1979. This paper develops a medium-scale macroeconomic model that incorporates real-timelearningby policy makers as well as a (potential) shift in policy makers' preferences. The empirical results show that combining both views—distorted policy makers' beliefs about the persistence of inflation and the inflation-output gap trade-off, accompanied by a stronger preference for inflation stabilization after 1979—illuminates the role played by monetary policy in propagating and ending the Great Inflation.
Determinants of Inflation Perceptions and Expectations: an Empirical Analysis for Austria
Monetary Policy & the Economy, 2015
This study uses micro data from a survey among 2,000 Austrian households conducted in 2013 to investigate the socioeconomic determinants of inflation perceptions and expectations. In our econometric analysis, we find that socioeconomically disadvantaged respondents (less income, lower educational attainment) and older interviewees tend to have higher inflation perceptions. In contrast, respondents living in larger households or in agglomerations with more than 5,000 inhabitants have lower inflation perceptions. As to inflation expectations, we find that older and less educated people tend to report higher inflation expectations. Additionally, we document that women tend to have higher inflation expectations than men and that knowledge of the Eurosystem’s definition of price stability dampens inflation expectations. Moreover, respondents who are skeptical about the reliability of the official inflation indicators state higher inflation expectations. As largely correct and realistic i...
The Anchoring of Long-Term Inflation Expectations of Consumers: Insights from a New Survey
SSRN Electronic Journal
We provide new evidence on the level and probability distribution of consumers' longterm expectations of inflation in the euro area and the Netherlands, using a representative Dutch survey. We find that consumers' long-term (ten years ahead) euro area inflation expectations are not well anchored at the ECB's inflation aim. First, median long-term euro area inflation expectations are 4%, 2pp above the ECB's inflation aim of 2%. Second, individual probability distributions of long-term euro area inflation expectations show that expected probabilities of higher inflation (2pp or more above the ECB's inflation aim) are much higher, at 28% on average, than those of lower inflation (2pp or more below the ECB's inflation aim), at 12%. This suggest that the de-anchoring of Dutch consumers' long-term euro area inflation expectations is mainly due to expected high inflation, rather than to expected low inflation (or deflation). This finding is in contrast to recent concerns by ECB monetary policymakers about a possible deanchoring of long-term inflation expectations on the downside. Furthermore, we find that consumers' long-term euro area inflation expectations are significantly higher if respondents have lower incomes. Based on measures of anchoring calculated directly from individual consumers' probability distributions of expected long-term inflation, namely the probability of inflation being close to target, the probability of inflation being far above target, and the probability of deflation, we also find that long-term euro area inflation expectations are better anchored for consumers with higher net household income.
Inflation expectations of the inattentive general public
Economic Modelling, 2015
The majority of academic research on central bank communication has analysed a central bank's audience as a single group. Analyses, especially empirical research, have focused almost exclusively on a central bank's interaction with the financial markets, facilitated by the availability of high-quality, high-frequency asset price data. In practice, a central bank's audience is heterogeneous, and recognising this is advantageous for both modelling purposes and effective central bank communication. Many central banks use a range of communication tools to reach their various audiences, but little formal analysis has been conducted to guide policy design and communication strategies. Gathering and processing information are costly for the general public, so they make rational decisions that limit the time and resources they allocate to these tasks. As a result, aggregate inflation expectations of the public as a whole can be described as 'sticky' in that the spread of information about inflation expectations through the economy is not instantaneous. A body of literature has emerged over the past decade, led by Mankiw and Reis (2001), who developed the Sticky Information Phillips Curve (SIPC), and Carroll (2002, 2003), who proposed microfoundations for the SIPC. This paper follows Carroll (2002, 2003) in adopting epidemiological models to provide insight into how the general public in South Africa forms its inflation expectations. This enables an estimation of the speed at which the South African general public updates its inflation expectations (information stickiness). Agent-based models, which explain the complex aggregate inflation expectations of the general public from the agent level upwards, are then used to verify these estimates of information stickiness and explore the microfoundations of aggregate inflation expectations.
Intergenerational Transmission of Inflation Aversion: Theory and Evidence
2009
We study the evolution of in ation aversion preferences across generations. In the theoretical part of the paper, we analyze the dynamics of such preferences in an overlapping-generations model with heterogenous mature agents characterized by dierent degrees of in ation aversion. We show how the stability of a society's degree of in ation aversion depends on the strength and speed of changes in the structure of the population. The empirical part then proposes two applications in support of the theoretical results. We rst link demographic structures to in ation aversion, and then proceed by looking at the relations between income (in)equality and measures of in ation aversion.
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.
Costly Inflation Misperceptions
SSRN Electronic Journal, 2007
One of the consequences of the euro changeover in 2002 was that for a period of several years people considerably overestimated actual inflation. The goal of this paper is to study whether misperceptions of this kind may have real effects, that is, whether they induce people to alter their behaviour. We also discuss the question how far the euro changeover and the ensuing discussion about price stability contributed to the recession that followed the changeover. Looking at the German restaurant sector, we find that people's misperceptions can have significant negative effects. The contraction this sector experienced in the months after the changeover was too pronounced to be explained by normal business cycle movements. We provide a discussion about the causes of these misperceptions and how to avoid them in future changeovers.