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

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Abstract

Using the microdata of the Michigan Survey of Consumers, we evaluate whether U.S. consumers form macroeconomic expectations consistent with different economic concepts. We check whether their expectations are in line with 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 and the Taylor Rule, while 25% 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 strong cyclical pattern. For all three concepts we find significant differences across demographic groups. Evaluating determinants of consistency, we provide evidence that the likelihood of having theory-consistent expectations with respect to the Phillips curve and the Taylor rule falls 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, we show that consumers with theory-consistent expectations have lower absolute inflation forecast errors and are closer to professionals' inflation forecasts.

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Bibliographic Info

Paper provided by KOF Swiss Economic Institute, ETH Zurich in its series KOF Working papers with number 13-345.

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Length: 33 pages
Date of creation: Nov 2013
Date of revision:
Handle: RePEc:kof:wpskof:13-345

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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 & Mirza Harun, 2014. "Inflation expectation dynamics: the role of past present and forward looking information," Sciences Po publications 2014-07, Sciences Po.
  2. repec:spo:wpecon:info:hdl:2441/6g0gsihsjmn5snc9pb0hlas97 is not listed on IDEAS

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