Advanced Search
MyIDEAS: Login

Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication

Contents:

Author Info

  • Dräger, L.
  • Lamla, M.J.
  • Pfajfar, D.

    (Tilburg University, Center for Economic Research)

Abstract

Using the microdata of the Michigan Survey of Consumers, we evaluate whether U.S. consumers form macroeconomic expectations consistent with different economic concepts, namely the Phillips curve, the Taylor rule and the Income Fisher equation. We observe that 50% of the surveyed population have expectations consistent with the Income Fisher equation, 46% consistent with the Taylor rule and 34% are in line with the Phillips curve. However, only 6% of consumers form theory-consistent expectations with respect to all three concepts. For the Taylor rule and the Phillips curve we observe a cyclical pattern. For all three concepts we find significant differences across demographic groups. Evaluating determinants of consistency, we provide evidence that consumers are less consistent with the Phillips curve and the Taylor rule during recessions and with inflation higher than 2%. Moreover, consistency with respect to all three concepts is affected by changes in the communication policy of the Fed, where the strongest positive effect on consistency comes from the introduction of the official inflation target. Finally, consumers with theory- consistent expectations have lower absolute inflation forecast errors and are closer to professionals' inflation forecasts.

(This abstract was borrowed from another version of this item.)

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://arno.uvt.nl/show.cgi?fid=132107
Our checks indicate that this address may not be valid because: 404 Not Found. If this is indeed the case, please notify (Richard Broekman)
Download Restriction: no

Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2013-063.

as in new window
Length:
Date of creation: 2013
Date of revision:
Handle: RePEc:dgr:kubcen:2013063

Contact details of provider:
Web page: http://center.uvt.nl

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
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.:
as in new window
  1. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
  2. Souleles, Nicholas S, 2004. "Expectations, Heterogeneous Forecast Errors, and Consumption: Micro Evidence from the Michigan Consumer Sentiment Surveys," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(1), pages 39-72, February.
  3. Fendel, Ralf & Frenkel, Michael & Rülke, Jan-Christoph, 2011. "'Ex-ante' Taylor rules - Newly discovered evidence from the G7 countries," Journal of Macroeconomics, Elsevier, vol. 33(2), pages 224-232, June.
  4. James H. Stock & Mark W. Watson, 2008. "Phillips curve inflation forecasts," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 53.
  5. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob de Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," DNB Working Papers 170, Netherlands Central Bank, Research Department.
  6. Jan-Egbert Sturm & Jakob de Haan, 2009. "Does central bank communication really lead to better forecasts of policy decisions? New evidence based on a Taylor rule model for the ECB," KOF Working papers 09-236, KOF Swiss Economic Institute, ETH Zurich.
  7. Fernanda Nechio & Carlos Carvalho, 2012. "Do People Understand Monetary Policy?," 2012 Meeting Papers 426, Society for Economic Dynamics.
  8. Christopher D Carroll & Wendy E Dunn, 1997. "Unemployment Expectations Jumping (Ss) Triggers and Household Balance Sheets," Economics Working Paper Archive 386, The Johns Hopkins University,Department of Economics.
  9. N. Gregory Mankiw & Ricardo Reis & Justin Wolfers, 2003. "Disagreement about Inflation Expectations," Harvard Institute of Economic Research Working Papers 2011, Harvard - Institute of Economic Research.
  10. Eric R. Sims, 2012. "Inflation Expectations and Readiness to Spend, Cross-Sectional Evidence," Working Papers 015, University of Notre Dame, Department of Economics, revised Mar 2012.
  11. Baghestani, Hamid & Kherfi, Samer, 2008. "How well do U.S. consumers predict the direction of change in interest rates?," The Quarterly Review of Economics and Finance, Elsevier, vol. 48(4), pages 725-732, November.
  12. Andrade, P. & Le Bihan, H., 2010. "Inattentive professional forecasters," Working papers 307, Banque de France.
  13. Richard T. Curtin, 2003. "Unemployment Expectations: The Impact of Private Information on Income Uncertainty," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 49(4), pages 539-554, December.
  14. Jonung, Lars, 1981. "Perceived and Expected Rates of Inflation in Sweden," American Economic Review, American Economic Association, vol. 71(5), pages 961-68, December.
  15. Wilbert van der Klaauw & Wandi Bruine de Bruin & Giorgio Topa & Basit Zafar & Olivier Armantier, 2012. "Inflation Expectations and Behavior: Do Survey Respondents Act on their Beliefs?," 2012 Meeting Papers 121, Society for Economic Dynamics.
  16. Menno Middeldorp, 2011. "FOMC communication policy and the accuracy of Fed Funds futures," Staff Reports 491, Federal Reserve Bank of New York.
  17. Branch, William A., 2007. "Sticky information and model uncertainty in survey data on inflation expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 245-276, January.
  18. Charles T. Carlstrom & Timothy S. Fuerst, 2008. "Explaining apparent changes in the Phillips curve: the Great Moderation and monetary policy," Economic Commentary, Federal Reserve Bank of Cleveland, issue Feb.
  19. Olivier Coibion & Yuriy Gorodnichenko, 2010. "Information Rigidity and the Expectations Formation Process: A Simple Framework and New Facts," Working Papers 102, Department of Economics, College of William and Mary.
  20. Michael Ehrmann & Marcel Fratzscher, 2007. "Communication by Central Bank Committee Members: Different Strategies, Same Effectiveness?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 509-541, 03.
  21. Tortorice Daniel Louis, 2012. "Unemployment Expectations and the Business Cycle," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-49, January.
  22. 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.
  23. Michael F. Bryan & Guhan Venkatu, 2001. "The demographics of inflation opinion surveys," Economic Commentary, Federal Reserve Bank of Cleveland, issue Oct.
  24. John B. Carlson & Ben Craig & Patrick Higgins & William R. Melick, 2006. "FOMC communications and the predictability of near-term policy decisions," Economic Commentary, Federal Reserve Bank of Cleveland, issue Jun.
  25. Yuriy Gorodnichenko & Olivier Coibion, 2010. "What can survey forecasts tell us about informational rigidities?," 2010 Meeting Papers 277, Society for Economic Dynamics.
  26. Pfajfar, D. & Santoro, E., 2008. "Asymmetries in Inflation Expectation Formation Across Demographic Groups," Cambridge Working Papers in Economics 0824, Faculty of Economics, University of Cambridge.
  27. Hayo, Bernd & Neuenkirch, Matthias, 2010. "Do Federal Reserve communications help predict federal funds target rate decisions?," Journal of Macroeconomics, Elsevier, vol. 32(4), pages 1014-1024, December.
  28. Ang, Andrew & Bekaert, Geert & Wei, Min, 2007. "Do macro variables, asset markets, or surveys forecast inflation better?," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1163-1212, May.
  29. 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.
  30. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. repec:spo:wpecon:info:hdl:2441/6g0gsihsjmn5snc9pb0hlas97 is not listed on IDEAS
  2. Paul Hubert & Harun Mirza, 2014. "Inflation expectation dynamics:the role of past, present and forward looking information," Documents de Travail de l'OFCE 2014-07, Observatoire Francais des Conjonctures Economiques (OFCE).

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:dgr:kubcen:2013063. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Richard Broekman).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.