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The Dynamics of European Inflation Expectations

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Author Info

  • Doepke Joerg

    ()
    (University of Applied Sciences, Merseburg)

  • Dovern Jonas

    ()
    (IfW Kiel)

  • Fritsche Ulrich

    ()
    (University Hamburg and DIW Berlin)

  • Slacalek Jiri

    ()
    (European Central Bank)

Abstract

We investigate the relevance of Carroll's sticky information model of inflation expectations for four major European economies (France, Germany, Italy and the United Kingdom). In contrast to the most rational expectation models, households in the sticky information environment update their expectations occasionally rather than instantaneously due to the costs of acquiring and processing information. Using survey data on household and expert inflation expectations we argue that the model adequately captures the dynamics of household inflation expectations. We estimate two alternative parametrizations of the sticky information model which differ in the stationarity assumptions about the underlying series. Our baseline stationary estimation suggests that the average frequency of information updating for European households is roughly once in 18 months. The vector error-correction model implies households update information about once a year.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 8 (2008)
Issue (Month): 1 (March)
Pages: 1-23

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Handle: RePEc:bpj:bejmac:v:8:y:2008:i:1:n:12

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  1. Christopher D Carroll, 2002. "Macroeconomic Expectations of Households and Professional Forecasters," Economics Working Paper Archive 477, The Johns Hopkins University,Department of Economics.
  2. William A. Branch, 2004. "The Theory of Rationally Heterogeneous Expectations: Evidence from Survey Data on Inflation Expectations," Economic Journal, Royal Economic Society, vol. 114(497), pages 592-621, 07.
  3. O'Reilly, Gerard & Whelan, Karl, 2004. "Has euro-area inflation persistence changed over time?," Working Paper Series 0335, European Central Bank.
  4. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information Versus Sticky Prices: A Proposal To Replace The New Keynesian Phillips Curve," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1295-1328, November.
  5. Carlson, John A & Parkin, J Michael, 1975. "Inflation Expectations," Economica, London School of Economics and Political Science, vol. 42(166), pages 123-38, May.
  6. Hashmat Khan & Zhenhua Zhu, 2002. "Estimates of the Sticky-Information Phillips Curve for the United States, Canada, and the United Kingdom," Working Papers 02-19, Bank of Canada.
  7. N. Gregory Mankiw & Ricardo Reis, 2006. "Pervasive Stickiness," American Economic Review, American Economic Association, vol. 96(2), pages 164-169, May.
  8. Gerberding, Christina, 2001. "The information content of survey data on expected price developments for monetary policy," Discussion Paper Series 1: Economic Studies 2001,09, Deutsche Bundesbank, Research Centre.
  9. Batchelor, Roy A & Orr, Adrian B, 1988. "Inflation Expectations Revisited," Economica, London School of Economics and Political Science, vol. 55(219), pages 317-31, August.
  10. Ehrmann, Michael & Fratzscher, Marcel, 2005. "Communication and decision-making by central bank committees: different strategies, same effectiveness?," Working Paper Series 0488, European Central Bank.
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