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Inflation Expectations of Households: Adaptive, Rational, or Sticky? Evidence from an Emerging Market Economy​​

Author

Listed:
  • Eddie Boy L. Fuentes

    (Bangko Sentral ng Pilipinas)

  • Mary Kryslette C. Bunyi

    (Bangko Sentral ng Pilipinas)

  • Cherrie R. Mapa

    (Bangko Sentral ng Pilipinas)

Abstract

Understanding the formation of inflation expectations is crucial for monetary policymaking, given that these expectations shape inflation dynamics. Using Bangko Sentral ng Pilipinas (BSP) Consumer Expectations Survey (CES) data, we test whether Filipino households’ inflation expectations can be characterized as adaptive, rational, or sticky. Empirical evidence indicates that households are partly adaptive and not fully rational. However, the survey data are more consistent with the sticky information model, which posits that agents are generally inattentive and infrequently update their forecasts. Results from an epidemiological model, validated using Bayesian posterior estimation, suggest that half of the households retain lagged, previous--quarter expectations; a third follow “rational” professional forecasts; and a fifth update adaptively based on the latest inflation data. We also estimate a state--dependent model, which shows that agents update forecasts more frequently during inflationary periods.

Suggested Citation

  • Eddie Boy L. Fuentes & Mary Kryslette C. Bunyi & Cherrie R. Mapa, 2025. "Inflation Expectations of Households: Adaptive, Rational, or Sticky? Evidence from an Emerging Market Economy​​," BSP Discussion Paper Series 202510, Bangko Sentral ng Pilipinas.
    • Handle: RePEc:bhd:dpaper:202510
    as

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    References listed on IDEAS

    as
    1. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2022. "Overreaction and Diagnostic Expectations in Macroeconomics," Journal of Economic Perspectives, American Economic Association, vol. 36(3), pages 223-244, Summer.
    2. 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)

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    More about this item

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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