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Measuring consumer uncertainty about future inflation

Author

Listed:
  • Wändi Bruine De Bruin
  • Charles F. Manski
  • Giorgio Topa
  • Wilbert van der Klaauw

Abstract

Survey measures of consumer inflation expectations have an important shortcoming in that, while providing useful summary measures of the distribution of point forecasts across individuals, they contain no direct information about an individual's uncertainty about future inflation. The latter is important not only for forecasting inflation and other macroeconomic outcomes, but also for assessing a central bank's credibility and effectiveness of communication. This paper explores the feasibility of eliciting individual consumers' subjective probability distributions of future inflation outcomes. ; In November 2007, we began administering web-based surveys to participants in RAND's American Life Panel. In addition to their point predictions, respondents were asked for their subjective assessments of the percentage chance that inflation will fall in each of several predetermined intervals. We find that our measures of individual forecast densities and uncertainty are internally consistent and reliable. Those who are more uncertain about year-ahead price inflation are also generally more uncertain about longer term price inflation and future wage changes. We find also that participants expressing higher uncertainty in their density forecasts make larger revisions to their point forecasts over time. Measures of central tendency derived from individual density forecasts are highly correlated with point forecasts, but they usually differ, often substantially, at the individual level. ; Finally, we relate our direct measure of aggregate consumer uncertainty to a more conventional approach that uses disagreement among individual forecasters, as seen in the dispersion of their point forecasts, as a proxy for forecast uncertainty. Although the two measures are positively correlated, our results suggest that disagreement and uncertainty are distinct concepts, both relevant to the analysis of inflation expectations.
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Suggested Citation

  • Wändi Bruine De Bruin & Charles F. Manski & Giorgio Topa & Wilbert van der Klaauw, 2011. "Measuring consumer uncertainty about future inflation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(3), pages 454-478, April.
  • Handle: RePEc:wly:japmet:v:26:y:2011:i:3:p:454-478
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    Cited by:

    1. Pfajfar, D. & Zakelj, B., 2012. "Uncertainty and Disagreement in Forecasting Inflation : Evidence from the Laboratory (Revised version of CentER DP 2011-053)," Discussion Paper 2012-072, Tilburg University, Center for Economic Research.
    2. Crump, Richard K. & Eusepi, Stefano & Tambalotti, Andrea & Topa, Giorgio, 2015. "Subjective intertemporal substitution," Staff Reports 734, Federal Reserve Bank of New York.
    3. Wilbert van der Klaauw, 2012. "On the Use of Expectations Data in Estimating Structural Dynamic Choice Models," Journal of Labor Economics, University of Chicago Press, vol. 30(3), pages 521-554.
    4. Johannsen, Benjamin K., 2014. "Inflation Experience and Inflation Expectations: Dispersion and Disagreement Within Demographic Groups," Finance and Economics Discussion Series 2014-89, Board of Governors of the Federal Reserve System (U.S.).
    5. Naohito Abe & Yuko Ueno, 2016. "The Mechanism of Inflation Expectation Formation among Consumers," UTokyo Price Project Working Paper Series 064, University of Tokyo, Graduate School of Economics.
    6. Rich, Robert W. & Tracy, Joseph, 2017. "The behavior of uncertainty and disagreement and their roles in economic prediction: a panel analysis," Staff Reports 808, Federal Reserve Bank of New York.
    7. Maurizio Bovi, 2016. "The tale of two expectations," Quality & Quantity: International Journal of Methodology, Springer, vol. 50(6), pages 2677-2705, November.
    8. Olivier Armantier & Wändi Bruine de Bruin & Giorgio Topa & Wilbert Klaauw & Basit Zafar, 2015. "Inflation Expectations And Behavior: Do Survey Respondents Act On Their Beliefs?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56, pages 505-536, May.
    9. Niu, G., 2014. "Essays on subjective expectations and mortality trends," Other publications TiSEM b9f72836-d8ad-478b-adca-4, Tilburg University, School of Economics and Management.
    10. Bruine de Bruin, Wändi & van der Klaauw, Wilbert & van Rooij, Maarten & Teppa, Federica & de Vos, Klaas, 2017. "Measuring expectations of inflation: Effects of survey mode, wording, and opportunities to revise," Journal of Economic Psychology, Elsevier, vol. 59(C), pages 45-58.
    11. repec:fip:fednep:00044 is not listed on IDEAS
    12. Wändi Bruine de Bruin & Simon M. Potter & Robert W. 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).
    13. Yasutomo Murasawa, 2013. "Measuring Inflation Expectations Using Interval-Coded Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 75(4), pages 602-623, August.
    14. Dovern, Jonas, 2015. "A multivariate analysis of forecast disagreement: Confronting models of disagreement with survey data," European Economic Review, Elsevier, vol. 80(C), pages 16-35.
    15. Nikola Mirkov & Andreas Steinhauer, 2014. "Are subjective distributions in inflation expectations symmetric?," ECON - Working Papers 173, Department of Economics - University of Zurich.
    16. Armantier, Olivier & Topa, Giorgio & Van der Klaauw, Wilbert & Zafar, Basit, 2017. "An overview of the Survey of Consumer Expectations," Economic Policy Review, Federal Reserve Bank of New York, issue 23-2, pages 51-72.
    17. Pfajfar, Damjan & Žakelj, Blaž, 2016. "Uncertainty in forecasting inflation and monetary policy design: Evidence from the laboratory," International Journal of Forecasting, Elsevier, vol. 32(3), pages 849-864.
    18. Riege, Anine H. & Teigen, Karl Halvor, 2013. "Additivity neglect in probability estimates: Effects of numeracy and response format," Organizational Behavior and Human Decision Processes, Elsevier, vol. 121(1), pages 41-52.
    19. Bryan, Michael F. & Meyer, Brent & Parker, Nicholas B., 2014. "The inflation expectations of firms: what do they look like, are they accurate, and do they matter?," FRB Atlanta Working Paper 2014-27, Federal Reserve Bank of Atlanta, revised 01 Jan 2015.
    20. Petra Gerlach & Peter Hördahl & Richhild Moessner, 2011. "Inflation expectations and the great recession," BIS Quarterly Review, Bank for International Settlements, March.
    21. Maurizio Bovi, 2014. "Shocks and the Expectations Formation Process. A Tale of Two Expectations," Natural Field Experiments 00390, The Field Experiments Website.
    22. Gabriele Galati & Peter Heemeijer & Richhild Moessner, 2011. "How do inflation expectations form? New insights from a high-frequency survey," DNB Working Papers 283, Netherlands Central Bank, Research Department.
    23. Abe, Naohito & Ueno, Yuko, 2016. "The Mechanism of Inflation Expectation Formation among Consumers," RCESR Discussion Paper Series DP16-1, Research Center for Economic and Social Risks, Institute of Economic Research, Hitotsubashi University.

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