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Asymmetries in Inflation Expectation Formation Across Demographic Groups

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  • Pfajfar, D.
  • Santoro, E.

Abstract

Relying on University of Michigan data on consumers.in.ation expectations, we establish some stylized facts on the process of in.ation expectation formation across different demographic groups. Percentile time series models are employed to test for rationality and to study learning dynamics across the whole cross-sectional spectrum of responses. These display a significant degree of heterogeneity and asymmetry. Income, education, and gender seem to be rather important characteristics when forecasting inflation. In particular, high income, highly educated, and male agents produce lower mean squared errors. Moreover, socioeconomically "disadvantaged" respondents assume as a reference point their specific consumption basket, while more advantaged respondents actually observe the general price level. A common observation applying to all socioeconomic groups is that agents positioned around the center of the distribution behave roughly in line with the rational expectations hypothesis. Agents on the left hand side of the median (LHS) of the distribution update information very infrequently. As to agents on the right hand side of the median (RHS), we can affirm that their expectations are consistent with adaptive learning and staggered information updating. However, the speed of learning can vary significantly across percentiles and di¤erent demographic groups.

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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0824.

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Length: 24
Date of creation: May 2008
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Handle: RePEc:cam:camdae:0824

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Web page: http://www.econ.cam.ac.uk/index.htm

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Keywords: Heterogeneous Expectations; Adaptive Learning; Survey Expectations.;

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References

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Citations

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Cited by:
  1. Henry Sabrowski, 2008. "Inflation Expectation Formation of German Consumers: Rational or Adaptive?," Working Paper Series in Economics 100, University of Lüneburg, Institute of Economics.
  2. David G. Blanchflower & Conall MacCoille, 2009. "The formation of inflation expectations: an empirical analysis for the UK," NBER Working Papers 15388, National Bureau of Economic Research, Inc.
  3. Pfajfar, D., 2012. "Formation of Rationally Heterogeneous Expectations," Discussion Paper 2012-083, Tilburg University, Center for Economic Research.
  4. Michael J. Lamla & Lena Dräger & Damjan Pfajfar, 2013. "Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication," KOF Working papers 13-345, KOF Swiss Economic Institute, ETH Zurich.
  5. Lena Dräger & Ulrich Fritsche, 2013. "Don't Worry, Be Right! Survey Wording Effects on In flation Perceptions and Expectations," Macroeconomics and Finance Series 201308, Hamburg University, Department Wirtschaft und Politik.
  6. Mary A. Burke & Michael Manz, 2011. "Economic literacy and inflation expectations: evidence from a laboratory experiment," Public Policy Discussion Paper 11-8, Federal Reserve Bank of Boston.
  7. Honkapohja , Seppo & Turunen, Arja H & Woodland, Alan D, 2011. "Growth, expectations and tariffs," Research Discussion Papers 9/2011, Bank of Finland.
  8. Menz, Jan-Oliver & Poppitz, Philipp, 2013. "Households' disagreement on inflation expectations and socioeconomic media exposure in Germany," Discussion Papers 27/2013, Deutsche Bundesbank, Research Centre.
  9. Emiliano Santoro & Damjan Pfajfar, 2006. "Heterogeneity and learning in inflation expectation formation: an empirical assessment," Department of Economics Working Papers 0607, Department of Economics, University of Trento, Italia.
  10. Yamamoto, Ryuichi & Hirata, Hideaki, 2013. "Strategy switching in the Japanese stock market," Journal of Economic Dynamics and Control, Elsevier, vol. 37(10), pages 2010-2022.
  11. Ueno, Yuko, 2014. "Updating Behavior of Inflation Expectations: Evidence from Japanese Household Panel Data," CIS Discussion paper series 617, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
  12. Pfajfar, Damjan & Santoro, Emiliano, 2010. "Heterogeneity, learning and information stickiness in inflation expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 75(3), pages 426-444, September.

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