Heterogeneity, learning and information stickiness in inflation expectations

D. Pfajfar, E. Santoro

Research output: Contribution to journalArticleScientificpeer-review

Abstract

In this paper we propose novel techniques for the empirical analysis of adaptive learning and sticky information in inflation expectations. These methodologies are applied to the distribution of households’ inflation expectations collected by the University of Michigan Survey Research Center. To account for the evolution of the cross-section of inflation forecasts over time and measure the degree of heterogeneity in private agents’ forecasts, we explore time series of percentiles from the empirical distribution. Our results show that heterogeneity is pervasive in the process of inflation expectation formation. We identify three regions of the distribution that correspond to different underlying mechanisms of expectation formation: a static or highly autoregressive region on the left hand side of the median, a nearly rational region around the median and a fraction of forecasts on the right hand side of the median formed in accordance with adaptive learning and sticky information.
Original languageEnglish
Pages (from-to)426-444
JournalJournal of Economic Behavior and Organization
Volume75
Issue number3
Publication statusPublished - 2010

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Inflation expectations
Median
Stickiness
Sticky information
Adaptive learning
Expectation formation
Empirical distribution
Research center
Inflation forecasts
Methodology
Household
Cross section
Survey research
Empirical analysis

Cite this

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Heterogeneity, learning and information stickiness in inflation expectations. / Pfajfar, D.; Santoro, E.

In: Journal of Economic Behavior and Organization, Vol. 75, No. 3, 2010, p. 426-444.

Research output: Contribution to journalArticleScientificpeer-review

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AU - Santoro, E.

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AB - In this paper we propose novel techniques for the empirical analysis of adaptive learning and sticky information in inflation expectations. These methodologies are applied to the distribution of households’ inflation expectations collected by the University of Michigan Survey Research Center. To account for the evolution of the cross-section of inflation forecasts over time and measure the degree of heterogeneity in private agents’ forecasts, we explore time series of percentiles from the empirical distribution. Our results show that heterogeneity is pervasive in the process of inflation expectation formation. We identify three regions of the distribution that correspond to different underlying mechanisms of expectation formation: a static or highly autoregressive region on the left hand side of the median, a nearly rational region around the median and a fraction of forecasts on the right hand side of the median formed in accordance with adaptive learning and sticky information.

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