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Inflation expectations and behavior: Do survey respondents act on their beliefs?

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Author Info

  • Olivier Armantier
  • Wändi Bruine de Bruin
  • Giorgio Topa
  • Wilbert van der Klaauw
  • Basit Zafar

Abstract

We compare the inflation expectations reported by consumers in a survey with their behavior in a financially incentivized investment experiment designed such that future inflation affects payoffs. The inflation expectations survey is found to be informative in the sense that the beliefs reported by the respondents are correlated with their choices in the experiment. Furthermore, most respondents appear to act on their inflation expectations showing patterns consistent (both in direction and magnitude) with expected utility theory. Respondents whose behavior cannot be rationalized tend to be less educated and to score lower on a numeracy and financial literacy scale. These findings are therefore the first to provide support to the microfoundations of modern macroeconomic models.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 509.

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Date of creation: 2011
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Handle: RePEc:fip:fednsr:509

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Keywords: Inflation (Finance) ; Consumer surveys ; Investments ; Financial literacy;

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References

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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Inflation expectations and rational behavior
    by Economic Logician in Economic Logic on 2012-11-30 16:00:00
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Carlos Madeira & Basit Zafar, 2012. "Heterogeneus Inflation Expectations Learning and Market Outcomes," Working Papers Central Bank of Chile 667, Central Bank of Chile.
  2. Amalia Di Girolamo & Glenn W. Harrison & Morten I. Lau & J. Todd Swarthout, 2013. "Characterizing Financial and Statistical Literacy," Experimental Economics Center Working Paper Series 2013-04, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
  3. repec:fce:doctra:13-03 is not listed on IDEAS
  4. Elmar Mertens, 2011. "Measuring the level and uncertainty of trend inflation," Finance and Economics Discussion Series 2011-42, Board of Governors of the Federal Reserve System (U.S.).
  5. Paul Hubert, 2013. "The influence and policy signaling role of FOMC forecasts," Documents de Travail de l'OFCE 2013-03, Observatoire Francais des Conjonctures Economiques (OFCE).
  6. Carlos Carvalho & Fernanda Nechio, 2012. "Do people undestand monetary policy?," Working Paper Series 2012-01, Federal Reserve Bank of San Francisco.
  7. 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.
  8. 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.
  9. Eva Arnold & Lena Dräger & Ulrich Fritsche, 2014. "Evaluating the Link between Consumers' Savings Portfolio Decisions, their Inflation Expectations and Economic News," Macroeconomics and Finance Series 201402, Hamburg University, Department Wirtschaft und Politik.
  10. Ernesto Reuben & Matthew Wiswall & Basit Zafar, 2013. "Preferences and biases in educational choices and labor market expectations: shrinking the black box of gender," Staff Reports 627, Federal Reserve Bank of New York.
  11. Olivier Armantier & Scott Nelson & Giorgio Topa & Wilbert van der Klaauw & Basit Zafar, 2012. "The price is right: updating of inflation expectations in a randomized price information experiment," Staff Reports 543, Federal Reserve Bank of New York.
  12. Bruine de Bruin, Wändi & van der Klaauw, Wilbert & Topa, Giorgio & Downs, Julie S. & Fischhoff, Baruch & Armantier, Olivier, 2012. "The effect of question wording on consumers’ reported inflation expectations," Journal of Economic Psychology, Elsevier, vol. 33(4), pages 749-757.
  13. Oya Celasun & Lev Ratnovski & Roxana Mihet, 2012. "Commodity Prices and Inflation Expectations in the United States," IMF Working Papers 12/89, International Monetary Fund.
  14. 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.
  15. José Antonio Murillo Garza & Paula Sánchez Romeu, 2012. "Testing the Predictive Power of Mexican Consumers' Inflation Expectations," Working Papers 2012-13, Banco de México.

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