IDEAS home Printed from https://ideas.repec.org/a/eee/joecas/v21y2020ics1703494919300891.html

Inflation uncertainty and inflation expectations: Micro-level evidence from the eurozone

Author

Listed:
  • Drakos, Konstantinos
  • Konstantinou, Panagiotis Th.
  • Thoma, Foteini-Anna

Abstract

This paper investigates the evolution of consumers’ inflation expectation. Using Eurobarometer survey data, we estimate models of the probability and the size of “forecast failure” of inflation forecasts. We document that higher inflation uncertainty, higher lagged inflation rates and increased inflation news volume reduce both the probability of failing to predict the correct inflation trajectory and the probability of making large forecast errors – in line with models featuring rational forecasting and sticky information. Furthermore, when the volatility of shocks to inflation increases, individuals tend to make incorrect inflation forecasts as well as large forecast ‘mistakes’, consistent with models featuring asymmetric loss functions. We also document heterogeneity in expectation formation related to demographic characteristics of respondents such as age, gender or education.

Suggested Citation

  • Drakos, Konstantinos & Konstantinou, Panagiotis Th. & Thoma, Foteini-Anna, 2020. "Inflation uncertainty and inflation expectations: Micro-level evidence from the eurozone," The Journal of Economic Asymmetries, Elsevier, vol. 21(C).
    • Handle: RePEc:eee:joecas:v:21:y:2020:i:c:s1703494919300891
    DOI: 10.1016/j.jeca.2019.e00150
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1703494919300891
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jeca.2019.e00150?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
    2. 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, President and Fellows of Harvard College, vol. 117(4), pages 1295-1328.
    3. Dräger, Lena & Lamla, Michael J., 2012. "Updating inflation expectations: Evidence from micro-data," Economics Letters, Elsevier, vol. 117(3), pages 807-810.
    4. Carlos Capistr¡N & Allan Timmermann, 2009. "Disagreement and Biases in Inflation Expectations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2-3), pages 365-396, March.
    5. Bartosz Mackowiak & Mirko Wiederholt, 2009. "Optimal Sticky Prices under Rational Inattention," American Economic Review, American Economic Association, vol. 99(3), pages 769-803, June.
    6. Maćkowiak, Bartosz & Moench, Emanuel & Wiederholt, Mirko, 2009. "Sectoral price data and models of price setting," Journal of Monetary Economics, Elsevier, vol. 56(S), pages 78-99.
    7. Christopher D Carroll, 2001. "The Epidemiology of Macroeconomic Expectations," Economics Working Paper Archive 462, The Johns Hopkins University,Department of Economics.
    8. Doepke Joerg & Dovern Jonas & Fritsche Ulrich & Slacalek Jiri, 2008. "The Dynamics of European Inflation Expectations," The B.E. Journal of Macroeconomics, De Gruyter, vol. 8(1), pages 1-23, March.
    9. Michael J. Lamla & Samad Sarferaz, 2012. "Updating Inflation Expectations," MAGKS Papers on Economics 201216, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    10. Mirko Wiederholt, 2010. "rational inattention," The New Palgrave Dictionary of Economics,, Palgrave Macmillan.
    11. Fernando Alvarez & Luigi Guiso & Francesco Lippi, 2012. "Durable Consumption and Asset Management with Transaction and Observation Costs," American Economic Review, American Economic Association, vol. 102(5), pages 2272-2300, August.
    12. Bartosz Maćkowiak & Mirko Wiederholt, 2015. "Business Cycle Dynamics under Rational Inattention," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 82(4), pages 1502-1532.
    13. Michael J. Lamla & Thomas Maag, 2012. "The Role of Media for Inflation Forecast Disagreement of Households and Professional Forecasters," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(7), pages 1325-1350, October.
    14. Christopher D. Carroll, 2003. "Macroeconomic Expectations of Households and Professional Forecasters," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(1), pages 269-298.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kučerová, Zuzana & Pakši, Daniel & Koňařík, Vojtěch, 2024. "Macroeconomic fundamentals and attention: What drives european consumers’ inflation expectations?," Economic Systems, Elsevier, vol. 48(1).
    2. Chee-Hong Law & Kim Huat Goh, 2024. "A systematic literature review of the implications of media on inflation expectations," International Economics and Economic Policy, Springer, vol. 21(2), pages 311-340, May.
    3. Carlos Medel, 2021. "Searching for the Best Inflation Forecasters within a Consumer Perceptions Survey: Microdata Evidence from Chile," Working Papers Central Bank of Chile 899, Central Bank of Chile.
    4. Gerotto, Luca & Paradiso, Antonio & Pellizzari, Paolo, 2025. "A tale of inattentiveness and the loss function: A model for household-level macroeconomic expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 236(C).
    5. Piotr Nowaczyk & Joanna Hernik, 2020. "Adopting the Euro will Cause an Increase in Prices: A Study on Inflationary Processes in Euro Area Member States," European Research Studies Journal, European Research Studies Journal, vol. 0(4), pages 377-403.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yingying Xu & Zhixin Liu & Zichao Jia & Chi-Wei Su, 2017. "Is time-variant information stickiness state-dependent?," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 16(3), pages 169-187, December.
    2. Vegard H. Larsen & Leif Anders Thorsrud & Julia Zhulanova, 2019. "News-driven inflation expectations and information rigidities," Working Papers No 03/2019, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    3. Lena Draeger, 2011. "Endogenous persistence with recursive inattentiveness," KOF Working papers 11-285, KOF Swiss Economic Institute, ETH Zurich.
    4. Christopher D. Carroll & Edmund Crawley & Jiri Slacalek & Kiichi Tokuoka & Matthew N. White, 2020. "Sticky Expectations and Consumption Dynamics," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(3), pages 40-76, July.
    5. Chee-Hong Law & Kim Huat Goh, 2024. "A systematic literature review of the implications of media on inflation expectations," International Economics and Economic Policy, Springer, vol. 21(2), pages 311-340, May.
    6. Bartosz Maćkowiak & Filip Matějka & Mirko Wiederholt, 2023. "Rational Inattention: A Review," Journal of Economic Literature, American Economic Association, vol. 61(1), pages 226-273, March.
    7. J r my Boccanfuso, 2022. "Consumption Response Heterogeneity and Dynamics with an Inattention Region," Working Papers wp1172, Dipartimento Scienze Economiche, Universita' di Bologna.
    8. Lena Dräger & Michael J. Lamla, 2017. "Imperfect Information and Consumer Inflation Expectations: Evidence from Microdata," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 79(6), pages 933-968, December.
    9. Xavier Gabaix, 2017. "Behavioral Inattention," NBER Working Papers 24096, National Bureau of Economic Research, Inc.
    10. Paul Hubert, 2014. "FOMC Forecasts as a Focal Point for Private Expectations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(7), pages 1381-1420, October.
    11. Lena Dräger & Michael Lamla, 2013. "Imperfect Information and Inflation Expectations: Evidence from Microdata," Macroeconomics and Finance Series 201301, University of Hamburg, Department of Socioeconomics.
    12. Lena Draeger & Michael J. Lamla, 2013. "Imperfect information and inflation expectations," KOF Working papers 13-329, KOF Swiss Economic Institute, ETH Zurich.
    13. Andrade, Philippe & Gautier, Erwan & Mengus, Eric, 2023. "What matters in households’ inflation expectations?," Journal of Monetary Economics, Elsevier, vol. 138(C), pages 50-68.
    14. Alex Nikolsko‐Rzhevskyy & Oleksandr Talavera & Nam Vu, 2023. "The flood that caused a drought," Economic Inquiry, Western Economic Association International, vol. 61(4), pages 965-981, October.
    15. Gabriele Galati & Peter Heemeijer & Richhild Moessner, 2011. "How do inflation expectations form? New insights from a high-frequency survey," BIS Working Papers 349, Bank for International Settlements.
    16. Ángelo Gutiérrez-Daza, 2024. "Business Cycles when Consumers Learn by Shopping," Working Papers 2024-12, Banco de México.
    17. Andrade, Philippe & Le Bihan, Hervé, 2013. "Inattentive professional forecasters," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 967-982.
    18. Ehrmann, M. & Pfajfar, D. & Santoro, E., 2014. "Consumer Attitudes and the Epidemiology of Inflation Expectations," Discussion Paper 2014-029, Tilburg University, Center for Economic Research.
    19. Kamdar, Rupal & Ray, Walker, 2024. "Attention-Driven Sentiment and the Business Cycle," CEPR Discussion Papers 18984, C.E.P.R. Discussion Papers.
    20. Dräger, Lena & Lamla, Michael J., 2012. "Updating inflation expectations: Evidence from micro-data," Economics Letters, Elsevier, vol. 117(3), pages 807-810.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:joecas:v:21:y:2020:i:c:s1703494919300891. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/the-journal-of-economic-asymmetries/ .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.