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Disagreement about Inflation Expectations

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  • N. Gregory Mankiw
  • Ricardo Reis
  • Justin Wolfers

Abstract

Analyzing 50 years of inflation expectations data from several sources, we document substantial disagreement among both consumers and professional economists about expected future inflation. Moreover, this disagreement shows substantial variation through time, moving with inflation, the absolute value of the change in inflation, and relative price variability. We argue that a satisfactory model of economic dynamics must speak to these important business cycle moments. Noting that most macroeconomic models do not endogenously generate disagreement, we show that a simple sticky-information' model broadly matches many of these facts. Moreover, the sticky-information model is consistent with other observed departures of inflation expectations from full rationality, including autocorrelated forecast errors and insufficient sensitivity to recent macroeconomic news.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9796.

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Date of creation: Jun 2003
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Publication status: published as Disagreement about Inflation Expectations , N. Gregory Mankiw, Ricardo Reis, Justin Wolfers. in NBER Macroeconomics Annual 2003, Volume 18 , Gertler and Rogoff. 2004
Handle: RePEc:nbr:nberwo:9796

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  7. Nicholas S. Souleles, 2001. "Consumer Sentiment: Its Rationality and Usefulness in Forecasting Expenditure - Evidence from the Michigan Micro Data," NBER Working Papers 8410, National Bureau of Economic Research, Inc.
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  23. Cukierman, Alex & Wachtel, Paul, 1979. "Differential Inflationary Expectations and the Variability of the Rate of Inflation: Theory and Evidence," American Economic Review, American Economic Association, American Economic Association, vol. 69(4), pages 595-609, September.
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