Heterogeneous Inflation Expectations, Learning, and Market Outcomes

39 Pages Posted: 22 Jan 2012

See all articles by Carlos Madeira

Carlos Madeira

Central Bank of Chile

Basit Zafar

Arizona State University

Date Written: January 1, 2012

Abstract

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.

Keywords: inflation expectations, imperfect information, heterogeneous expectations, learning, sticky information

JEL Classification: C53, C81, E31, E37, D83, D84

Suggested Citation

Madeira, Carlos and Zafar, Basit, Heterogeneous Inflation Expectations, Learning, and Market Outcomes (January 1, 2012). FRB of New York Staff Report No. 536, Available at SSRN: https://ssrn.com/abstract=1989115 or http://dx.doi.org/10.2139/ssrn.1989115

Carlos Madeira

Central Bank of Chile ( email )

Agustinas 1180
Santiago, RM 8340454
Chile
+56226702243 (Phone)

HOME PAGE: http://https://sites.google.com/view/cmadeira/

Basit Zafar (Contact Author)

Arizona State University ( email )

WP Carey School of Business, ASU
Tempe, AZ 85287
United States
9179326564 (Phone)

HOME PAGE: http://https://sites.google.com/site/basitakzafar/

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