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Economic literacy and inflation expectations: evidence from a laboratory experiment

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  • Mary A. Burke
  • Michael Manz

Abstract

We present new experimental evidence on heterogeneity in the formation of inflation expectations and relate the variation to economic literacy and demographics. The experimental design allows us to investigate two channels through which expectations-formation may vary across individuals: (1) the choice of information and (2) the use of given information. Subjects who are more economically literate perform better along both dimensions—they choose more-relevant information and make better use of given information. Compared with survey data on inflation expectations, fewer demographic factors are associated with variation in inflation expectations, and economic literacy in most cases accounts for demographic variation in expectations.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Boston in its series Public Policy Discussion Paper with number 11-8.

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Date of creation: 2011
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Handle: RePEc:fip:fedbpp:11-8

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Keywords: Inflation (Finance) ; Financial literacy;

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References

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  1. Dwyer, Gerald P, Jr, et al, 1993. "Tests of Rational Expectations in a Stark Setting," Economic Journal, Royal Economic Society, vol. 103(418), pages 586-601, May.
  2. Christopher D Carroll, 2002. "Macroeconomic Expectations of Households and Professional Forecasters," Economics Working Paper Archive 477, The Johns Hopkins University,Department of Economics.
  3. 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.
  4. Olivier Armantier & Wändi Bruine de Bruin & Giorgio Topa & Wilbert van der Klaauw & Basit Zafar, 2011. "Inflation expectations and behavior: Do survey respondents act on their beliefs?," Staff Reports 509, Federal Reserve Bank of New York.
  5. Marimon, R. & Sunder, S., 1995. "Does a Constant Money Growth Rule Help Stabilize Inflation?: Experimental Evidence," GSIA Working Papers 1995-04, Carnegie Mellon University, Tepper School of Business.
  6. M.C.J. van Rooij & Annamaria Lusardi & R. Alessie, 2007. "Financial Literacy and Stock Market Participation," Working Papers 07-23, Utrecht School of Economics.
  7. Jonung, Lars, 1981. "Perceived and Expected Rates of Inflation in Sweden," American Economic Review, American Economic Association, vol. 71(5), pages 961-68, December.
  8. Klaus Adam, 2007. "Experimental Evidence on the Persistence of Output and Inflation," Economic Journal, Royal Economic Society, vol. 117(520), pages 603-636, 04.
  9. Otwin Becker & Johannes Leitner & Ulrike Leopold-Wildburger, 2009. "Expectation formation and regime switches," Experimental Economics, Springer, vol. 12(3), pages 350-364, September.
  10. Bergmann, Barbara R., 1988. "An experiment on the formation of expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 9(2), pages 137-151, March.
  11. Hey, John D., 1994. "Expectations formation: Rational or adaptive or ...?," Journal of Economic Behavior & Organization, Elsevier, vol. 25(3), pages 329-349, December.
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Cited by:
  1. Lena Dräger & Michael J. Lamla & Damjan Pfajfar, 2014. "Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication," Macroeconomics and Finance Series 201401, Hamburg University, Department Wirtschaft und Politik.
  2. Georganas, Sotiris & Healy, Paul J. & Li, Nan, 2014. "Frequency bias in consumers׳ perceptions of inflation: An experimental study," European Economic Review, Elsevier, vol. 67(C), pages 144-158.
  3. Pfajfar, D., 2012. "Formation of Rationally Heterogeneous Expectations," Discussion Paper 2012-083, Tilburg University, Center for Economic Research.
  4. 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.
  5. Thomas A. Garrett, 2011. "A Federal Reserve System conference on research in applied microeconomics," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 455-462.
  6. 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.
  7. Xu, Lisa & Zia, Bilal, 2012. "Financial literacy around the world : an overview of the evidence with practical suggestions for the way forward," Policy Research Working Paper Series 6107, The World Bank.

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