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The Price Is Right: Updating Inflation Expectations in a Randomized Price Information Experiment

Author

Listed:
  • Olivier Armantier

    (Federal Reserve Bank of New York)

  • Scott Nelson

    (MIT)

  • Giorgio Topa

    (Federal Reserve Bank of New York)

  • Wilbert van der Klaauw

    (Federal Reserve Bank of New York)

  • Basit Zafar

    (Federal Reserve Bank of New York)

Abstract

Using a unique, randomized information experiment embedded in a survey, this paper investigates how consumers’ inflation expectations respond to new information. We find that respondents, on average, update their expectations in response to (certain types of) information, and do so sensibly, in a manner consistent with Bayesian updating. As a result of information provision, the distribution of inflation expectations converges toward its center and cross-sectional disagreement declines. We document heterogeneous information processing by gender and present suggestive evidence of respondents forecasting under asymmetric loss. Our results provide support for expectation-formation models in which agents form expectations rationally but face information constraints.

Suggested Citation

  • Olivier Armantier & Scott Nelson & Giorgio Topa & Wilbert van der Klaauw & Basit Zafar, 2016. "The Price Is Right: Updating Inflation Expectations in a Randomized Price Information Experiment," The Review of Economics and Statistics, MIT Press, vol. 98(3), pages 503-523, July.
  • Handle: RePEc:tpr:restat:v:98:y:2016:i:3:p:503-523
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    More about this item

    Keywords

    inflation expectations; information; heterogeneous expectations; updating; Bayesian learning;
    All these keywords.

    JEL classification:

    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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