Advanced Search
MyIDEAS: Login to save this paper or follow this series

Inflation Expectations and Behavior: Do Survey Respondents Act on their Beliefs?

Contents:

Author Info

  • Wilbert van der Klaauw

    (Federal Reserve Bank of New York)

  • Wandi Bruine de Bruin

    (Carnegie Mellon University)

  • Giorgio Topa

    (Federal Reserve Bank of New York)

  • Basit Zafar

    (Federal Reserve Bank of New York)

  • Olivier Armantier

    (Federal Reserve Bank of New York)

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 micro-foundations of modern macroeconomic models.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.economicdynamics.org/meetpapers/2012/paper_121.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 121.

as in new window
Length:
Date of creation: 2012
Date of revision:
Handle: RePEc:red:sed012:121

Contact details of provider:
Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Fax: 1-314-444-8731
Email:
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC

Related research

Keywords:

Other versions of this item:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Ball, Laurence & Croushore, Dean, 2003. " Expectations and the Effects of Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 473-84, August.
  2. Charles F. Manski, 2004. "Interpreting the Predictions of Prediction Markets," NBER Working Papers 10359, National Bureau of Economic Research, Inc.
  3. Fehr, Ernst & Tyran, Jean-Robert, 2004. "Money Illusion and Coordination Failure," IZA Discussion Papers 1013, Institute for the Study of Labor (IZA).
  4. Bryan, Michael F & Gavin, William T, 1986. "Models of Inflation Expectations Formation: A Comparison of Household and Economist Forecasts: A Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(4), pages 539-44, November.
  5. Carlos Capistrán & Allan Timmermann, 2006. "Disagreement and Biases in Inflation Expectations," Working Papers 2006-07, Banco de México.
  6. Bettinger, Eric & Slonim, Robert, 2007. "Patience among children," Journal of Public Economics, Elsevier, vol. 91(1-2), pages 343-363, February.
  7. M. Hashem Pesaran & Martin Weale, 2005. "Survey Expectations," CESifo Working Paper Series 1599, CESifo Group Munich.
  8. Caliendo, Marco & Fossen, Frank M. & Kritikos, Alexander S., 2008. "The Impact of Risk Attitudes on Entrepreneurial Survival," IZA Discussion Papers 3525, Institute for the Study of Labor (IZA).
  9. Philip Ducaju & Erwan Gautier & Daphné Momferatou & Mélanie Ward-Warmedinge, 2008. "Institutional features of wage bargaining in 23 European countries, the US and Japan," Working Paper Research 154, National Bank of Belgium.
  10. Bonin, Holger & Dohmen, Thomas & Falk, Armin & Huffman, David & Sunde, Uwe, 2007. "Cross-sectional earnings risk and occupational sorting: The role of risk attitudes," Labour Economics, Elsevier, vol. 14(6), pages 926-937, December.
  11. Michael Woodford, 2005. "Central-bank communication and policy effectiveness," Discussion Papers 0506-07, Columbia University, Department of Economics.
  12. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Harvard Institute of Economic Research Working Papers 1922, Harvard - Institute of Economic Research.
  13. Bartosz Mackowiak & Mirko Wiederholt, 2004. "Optimal Sticky Prices under Rational Inattention," SFB 649 Discussion Papers SFB649DP2005-040, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany, revised Jul 2005.
  14. Klaus Adam & Mario Padula, 2011. "Inflation Dynamics And Subjective Expectations In The United States," Economic Inquiry, Western Economic Association International, vol. 49(1), pages 13-25, 01.
  15. Baghestani, Hamid, 1992. "Survey Evidence on the Muthian Rationality of the Inflation Forecasts of U.S. Consumers," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(2), pages 173-86, May.
  16. Wändi Bruine de Bruin & Simon Potter & Robert Rich & Giorgio Topa & Wilbert van der Klaauw, 2010. "Improving survey measures of household inflation expectations," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 16(Aug/Sep).
  17. Andrew Ang & Geert Bekaert & Min Wei, 2006. "Do macro variables, asset markets, or surveys forecast inflation better?," Finance and Economics Discussion Series 2006-15, Board of Governors of the Federal Reserve System (U.S.).
  18. Christian Merkl, 2008. "Galí J: Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework," Journal of Economics, Springer, vol. 95(2), pages 179-181, November.
  19. Miguel A. Costa-Gomes & Georg Weizsäcker, 2004. "Stated Beliefs and Play in Normal Form Games," Levine's Bibliography 122247000000000236, UCLA Department of Economics.
  20. Batchelor, Roy A & Dua, Pami, 1989. "Household versus Economist Forecasts of Inflation: A Reassessment: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(2), pages 252-57, May.
  21. Campbell, John, 2006. "Household Finance," Scholarly Articles 3157877, Harvard University Department of Economics.
  22. Annamaria Lusardi & Olivia S. Mitchell, 2008. "Planning and Financial Literacy: How Do Women Fare?," NBER Working Papers 13750, National Bureau of Economic Research, Inc.
  23. Keane, Michael P & Runkle, David E, 1990. "Testing the Rationality of Price Forecasts: New Evidence from Panel Data," American Economic Review, American Economic Association, vol. 80(4), pages 714-35, September.
  24. Ricardo Nunes, 2010. "Inflation Dynamics: The Role of Expectations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(6), pages 1161-1172, 09.
  25. Glenn W. Harrison & John A. List, 2004. "Field Experiments," Journal of Economic Literature, American Economic Association, vol. 42(4), pages 1009-1055, December.
  26. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  27. Dean Croushore, 1996. "Inflation forecasts: how good are they?," Business Review, Federal Reserve Bank of Philadelphia, issue May, pages 15-25.
  28. Peter Wakker & Veronika Köbberling & Christiane Schwieren, 2007. "Prospect-theory’s Diminishing Sensitivity Versus Economics’ Intrinsic Utility of Money: How the Introduction of the Euro can be Used to Disentangle the Two Empirically," Theory and Decision, Springer, vol. 63(3), pages 205-231, November.
  29. Jonung, Lars, 1981. "Perceived and Expected Rates of Inflation in Sweden," American Economic Review, American Economic Association, vol. 71(5), pages 961-68, December.
  30. Olivier Armantier, 2006. "Do Wealth Differences Affect Fairness Considerations?," CIRANO Working Papers 2006s-13, CIRANO.
  31. Thomas Dohmen & Melanie Khamis & Hartmut Lehmann, 2010. "Risk Attitudes and the Incidence of Informality among Workers: Evidence from a Transition Country," ESCIRRU Working Papers 22, DIW Berlin, German Institute for Economic Research.
  32. Inoue, Atsushi & Kilian, Lutz & Kiraz, Fatma Burcu, 2006. "Do Actions Speak Louder than Words? Household Expectations of Inflation Based on Micro Consumption Data," CEPR Discussion Papers 5790, C.E.P.R. Discussion Papers.
  33. Jordi Galí, 2008. "Introduction to Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework
    [Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Ke
    ," Introductory Chapters, Princeton University Press.
  34. Charles F. Manski, 2004. "Measuring Expectations," Econometrica, Econometric Society, vol. 72(5), pages 1329-1376, 09.
  35. Lloyd B. Thomas, 1999. "Survey Measures of Expected U.S. Inflation," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 125-144, Fall.
  36. Ehrbeck, Tilman & Waldmann, Robert, 1996. "Why Are Professional Forecasters Biased? Agency versus Behavioral Explanations," The Quarterly Journal of Economics, MIT Press, vol. 111(1), pages 21-40, February.
  37. Wandi Bruine de Bruin & Charles F. Manski & Giorgio Topa & Wilbert van der Klaauw, 2009. "Measuring consumer uncertainty about future inflation," Staff Reports 415, Federal Reserve Bank of New York.
Full references (including those not matched with items on IDEAS)

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.
as in new window

Cited by:
  1. Michael J. Lamla & Lena Dräger & Damjan Pfajfar, 2013. "Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication," KOF Working papers 13-345, KOF Swiss Economic Institute, ETH Zurich.
  2. Reuben, Ernesto & Wiswall, Matthew & Zafar, Basit, 2013. "Preferences and Biases in Educational Choices and Labor Market Expectations: Shrinking the Black Box of Gender," IZA Discussion Papers 7579, Institute for the Study of Labor (IZA).
  3. 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.
  4. Carlos Madeira & Basit Zafar, 2012. "Heterogeneus Inflation Expectations Learning and Market Outcomes," Working Papers Central Bank of Chile 667, Central Bank of Chile.
  5. Carlos Carvalho & Fernanda Nechio, 2013. "Do People Understand Monetary Policy?," Textos para discussão 618, Department of Economics PUC-Rio (Brazil).
  6. 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).
  7. repec:fce:doctra:13-03 is not listed on IDEAS
  8. 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.
  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. Oya Celasun & Lev Ratnovski & Roxana Mihet, 2012. "Commodity Prices and Inflation Expectations in the United States," IMF Working Papers 12/89, International Monetary Fund.
  11. José Antonio Murillo Garza & Paula Sánchez Romeu, 2012. "Testing the Predictive Power of Mexican Consumers' Inflation Expectations," Working Papers 2012-13, Banco de México.
  12. 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.).
  13. 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.
  14. 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.
  15. 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.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:red:sed012:121. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.