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

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  • Lena Dräger

    ()
    (Universität Hamburg (University of Hamburg))

  • Michael J. Lamla

    ()
    (University of Essex and ETH Zurich)

  • Damjan Pfajfar

    ()
    (EBC, CentER, University of Tilburg)

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.

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File URL: http://www.wiso.uni-hamburg.de/repec/hepdoc/macppr_1_2014.pdf
File Function: First version, 2014
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Bibliographic Info

Paper provided by Hamburg University, Department Wirtschaft und Politik in its series Macroeconomics and Finance Series with number 201401.

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Length: 36 pages
Date of creation: Jan 2014
Date of revision:
Handle: RePEc:hep:macppr:201401

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Web page: http://www.wiso.uni-hamburg.de/dwp
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Keywords: Macroeconomic expectations; microdata; macroeconomic literacy; central bank communication; consumer forecast accuracy.;

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Cited by:
  1. 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).
  2. repec:spo:wpecon:info:hdl:2441/6g0gsihsjmn5snc9pb0hlas97 is not listed on IDEAS

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