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The Dynamics of European Inflation Expectations

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  • Jörg Döpke
  • Jonas Dovern
  • Ulrich Fritsche
  • Jiri Slacalek

Abstract

We investigate the relevance of the Carroll's sticky information model of inflation expectations for four major European economies (France, Germany, Italy and the United Kingdom). Using survey data on household and expert inflation expectations we argue that the model adequately captures the dynamics of household inflation expectations. We estimate two alternative parametrizations of the sticky information model which differ in the stationarity assumptions about the underlying series. Our baseline stationary estimation suggests that the average frequency of information updating for the European households is roughly once in 18 months. The vector error-correction model implies households update information about once a year.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.44189.de/dp571.pdf
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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 571.

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Length: 16 p.
Date of creation: 2006
Date of revision:
Handle: RePEc:diw:diwwpp:dp571

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Keywords: Inflation expectations; sticky information; inflation persistence;

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References

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  1. N. Gregory Mankiw & Ricardo Reis, 2006. "Pervasive Stickiness," American Economic Review, American Economic Association, vol. 96(2), pages 164-169, May.
  2. Ehrmann, Michael & Fratzscher, Marcel, 2005. "Communication and decision-making by central bank committees: different strategies, same effectiveness?," Working Paper Series 0488, European Central Bank.
  3. 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.
  4. Christopher D Carroll, 2002. "Macroeconomic Expectations of Households and Professional Forecasters," Economics Working Paper Archive 477, The Johns Hopkins University,Department of Economics.
  5. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information Versus Sticky Prices: A Proposal To Replace The New Keynesian Phillips Curve," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1295-1328, November.
  6. Gerberding, Christina, 2001. "The information content of survey data on expected price developments for monetary policy," Discussion Paper Series 1: Economic Studies 2001,09, Deutsche Bundesbank, Research Centre.
  7. Gerard O'Reilly & Karl Whelan, 2005. "Has Euro-Area Inflation Persistence Changed Over Time?," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 709-720, November.
  8. Carlson, John A & Parkin, J Michael, 1975. "Inflation Expectations," Economica, London School of Economics and Political Science, vol. 42(166), pages 123-38, May.
  9. Batchelor, Roy A & Orr, Adrian B, 1988. "Inflation Expectations Revisited," Economica, London School of Economics and Political Science, vol. 55(219), pages 317-31, August.
  10. Hashmat Khan & Zhenhua Zhu, 2002. "Estimates of the Sticky-Information Phillips Curve for the United States, Canada, and the United Kingdom," Working Papers 02-19, Bank of Canada.
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