Imperfect Information and Inflation Expectations: Evidence from Microdata

KOF Working Papers No. 329

41 Pages Posted: 9 Feb 2013

See all articles by Lena Dräger

Lena Dräger

Leibniz University Hannover

Michael J. Lamla

ETH Zurich - KOF Swiss Economic Institute; University of Essex

Date Written: February 8, 2013

Abstract

We investigate the updating behavior of individual consumers regarding their short and long-run inflation expectations. Utilizing the University of Michigan Survey of Consumer’s rotating panel microstructure, we can identify whether individuals adjust their inflation expectations over a period of six months. We find evidence that the updating frequency has been underestimated. Furthermore, looking at the possible determinants of an update we find support for imperfect information models. Moreover, individual expectations are found to be more accurate after an update and forecast accuracy is affected by inflation volatility measures and news regarding inflation. Finally, the updating frequency is found to significantly move spreads in bond markets.

Keywords: Rational Inattention, updating inflation expectations, microdata, news

JEL Classification: D84, E31

Suggested Citation

Dräger, Lena and Lamla, Michael J. and Lamla, Michael J., Imperfect Information and Inflation Expectations: Evidence from Microdata (February 8, 2013). KOF Working Papers No. 329, Available at SSRN: https://ssrn.com/abstract=2213765 or http://dx.doi.org/10.2139/ssrn.2213765

Lena Dräger

Leibniz University Hannover ( email )

Königsworther Platz 1
Hannover, 30167
Germany

Michael J. Lamla (Contact Author)

ETH Zurich - KOF Swiss Economic Institute ( email )

Zurich
Switzerland

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

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