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Disagreement about Inflation Expectations

In: NBER Macroeconomics Annual 2003, Volume 18

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  • N. Gregory Mankiw
  • Ricardo Reis
  • Justin Wolfers

Abstract

Analyzing 50 years of inflation expectations data from several sources, we document substantial disagreement among both consumers and professional economists about expected future inflation. Moreover, this disagreement shows substantial variation through time, moving with inflation, the absolute value of the change in inflation, and relative price variability. We argue that a satisfactory model of economic dynamics must speak to these important business cycle moments. Noting that most macroeconomic models do not endogenously generate disagreement, we show that a simple "sticky-information" model broadly matches many of these facts. Moreover, the sticky-information model is consistent with other observed departures of inflation expectations from full rationality, including autocorrelated forecast errors and insufficient sensitivity to recent macroeconomic news.

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This chapter was published in:

  • Mark Gertler & Kenneth Rogoff, 2004. "NBER Macroeconomics Annual 2003, Volume 18," NBER Books, National Bureau of Economic Research, Inc, number gert04-1, October.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 11444.

    Handle: RePEc:nbr:nberch:11444

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    1. Laurence Ball, 2000. "Near-Rationality and Inflation in Two Monetary Regimes," NBER Working Papers 7988, National Bureau of Economic Research, Inc.
    2. Levi, Maurice D & Makin, John H, 1979. "Fisher, Phillips, Friedman and the Measured Impact of Inflation on Interest," Journal of Finance, American Finance Association, vol. 34(1), pages 35-52, March.
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    4. Laurence Ball & Dean Croushore, 1998. "Expectations and the effects of monetary policy," Working Papers 98-13, Federal Reserve Bank of Philadelphia.
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    18. Dean Croushore, 1997. "The Livingston Survey: still useful after all these years," Business Review, Federal Reserve Bank of Philadelphia, issue Mar, pages 15-27.
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    20. Bomberger, William A & Frazer, William J, Jr, 1981. "Interest Rates, Uncertainty and the Livingston Data," Journal of Finance, American Finance Association, vol. 36(3), pages 661-75, June.
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