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Disagreement about Inflation Expectations

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Author Info
N. Gregory Mankiw
Ricardo Reis
Justin Wolfers

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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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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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Handle: RePEc:nbr:nberwo:9796

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E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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References listed on IDEAS
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  1. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information Versus Sticky Prices: A Proposal To Replace The New Keynesian Phillips Curve," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1295-1328, November. [Downloadable!] (restricted)
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  2. Victor Zarnowitz & Louis A. Lambros, 1987. "Consensus and Uncertainty in Economic Prediction," NBER Working Papers 1171, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. Michael F. Bryan & Stephen G. Cecchetti, 1994. "Measuring Core Inflation," NBER Chapters, in: Monetary Policy, pages 195-219 National Bureau of Economic Research, Inc. [Downloadable!]
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  5. Makin, John H, 1982. "Anticipated Money, Inflation Uncertainty and Real Economic Activity," The Review of Economics and Statistics, MIT Press, vol. 64(1), pages 126-34, February. [Downloadable!] (restricted)
  6. Zarnowitz, Victor & Lambros, Louis A, 1987. "Consensus and Uncertainty in Economic Prediction," Journal of Political Economy, University of Chicago Press, vol. 95(3), pages 591-621, June. [Downloadable!] (restricted)
  7. Makin, John H, 1983. "Real Interest, Money Surprises, Anticipated Inflation and Fiscal Deficits," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 374-84, August. [Downloadable!] (restricted)
  8. Dean Croushore, 1993. "Introducing: the survey of professional forecasters," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 3-15. [Downloadable!]
  9. Christopher D Carroll, 2001. "The Epidemiology of Macroeconomic Expectations," Economics Working Paper Archive 462, The Johns Hopkins University,Department of Economics. [Downloadable!]
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  10. Brenner, Menachem & Landskroner, Yoram, 1983. "Inflation Uncertainties and Returns on Bonds," Economica, London School of Economics and Political Science, vol. 50(200), pages 463-68, November. [Downloadable!] (restricted)
  11. Levi, Maurice D & Makin, John H, 1979. "Fisher, Phillips, Friedman and the Measured Impact of Inflation on Interest," Journal of Finance, American Finance Association, vol. 34(1), pages 35-52, March. [Downloadable!] (restricted)
  12. Laurence Ball, 2000. "Near-Rationality and Inflation in Two Monetary Regimes," NBER Working Papers 7988, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Laurence Ball & N Gregory Mankiw & Ricardo Reis, 2003. "Monetary Policy for Inattentive Economies," Economics Working Paper Archive 491, The Johns Hopkins University,Department of Economics. [Downloadable!]
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  14. Laurence Ball & Dean Croushore, 1995. "Expectations and the Effects of Monetary Policy," NBER Working Papers 5344, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. 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, vol. 69(4), pages 595-609, September. [Downloadable!] (restricted)
  16. Lloyd B. Thomas Jr., 1999. "Survey Measures of Expected U.S. Inflation," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 125-144, Fall. [Downloadable!] (restricted)
  17. Bomberger, William A & Frazer, William J, Jr, 1981. "Interest Rates, Uncertainty and the Livingston Data," Journal of Finance, American Finance Association, vol. 36(3), pages 661-75, June. [Downloadable!] (restricted)
  18. William T. Gavin, 2003. "FOMC forecasts: is all the information in the central tendency?," Working Papers 2003-002, Federal Reserve Bank of St. Louis. [Downloadable!]
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  19. Mullineaux, Donald J, 1980. "Inflation Expectations and Money Growth in the United States," American Economic Review, American Economic Association, vol. 70(1), pages 149-61, March.
  20. John H. Makin, 1982. "Anticipated Money, Inflation Uncertainty, and Real Economic Activity," NBER Working Papers 0760, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  21. Hashmat Khan & Zhenhua Zhu, 2002. "Estimates of the Sticky-Information Phillips Curve for the United States, Canada, and the United Kingdom," Working Papers 02-19, Bank of Canada. [Downloadable!]
  22. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information: A Model of Monetary Nonneutrality and Structural Slumps," Harvard Institute of Economic Research Working Papers 1941, Harvard - Institute of Economic Research. [Downloadable!]
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  23. Dean Croushore, 1997. "The Livingston Survey: still useful after all these years," Business Review, Federal Reserve Bank of Philadelphia, issue Mar, pages 15-27. [Downloadable!]
  24. Christopher D. Carroll, 2003. "Macroeconomic Expectations Of Households And Professional Forecasters," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 269-298, February. [Downloadable!] (restricted)
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