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Asymmetries in Inflation Expectation Formation Across Demographic Groups

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Author Info
Pfajfar, D.
Santoro, E.

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

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
J10 - Labor and Demographic Economics - - Demographic Economics - - - General

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References listed on IDEAS
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  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. [Downloadable!]
  2. 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. [Downloadable!]
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