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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, July.
    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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    2. Nicholas S. Souleles, 2001. "Consumer Sentiment: Its Rationality and Usefulness in Forecasting Expenditure - Evidence from the Michigan Micro Data," NBER Working Papers 8410, National Bureau of Economic Research, Inc.
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    4. 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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    20. Christopher D Carroll, 2002. "Macroeconomic Expectations of Households and Professional Forecasters," Economics Working Paper Archive 477, The Johns Hopkins University,Department of Economics.
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