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Asymmetries in Inflation Expectation Formation Across Demographic Groups

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  • Pfajfar, D.
  • Santoro, E.

Abstract

Relying on University of Michigan data on consumers.in.ation expectations, we establish some stylized facts on the process of in.ation expectation formation across different demographic groups. Percentile time series models are employed to test for rationality and to study learning dynamics across the whole cross-sectional spectrum of responses. These display a significant degree of heterogeneity and asymmetry. Income, education, and gender seem to be rather important characteristics when forecasting inflation. In particular, high income, highly educated, and male agents produce lower mean squared errors. Moreover, socioeconomically "disadvantaged" respondents assume as a reference point their specific consumption basket, while more advantaged respondents actually observe the general price level. A common observation applying to all socioeconomic groups is that agents positioned around the center of the distribution behave roughly in line with the rational expectations hypothesis. Agents on the left hand side of the median (LHS) of the distribution update information very infrequently. As to agents on the right hand side of the median (RHS), we can affirm that their expectations are consistent with adaptive learning and staggered information updating. However, the speed of learning can vary significantly across percentiles and di¤erent demographic groups.

Suggested Citation

  • Pfajfar, D. & Santoro, E., 2008. "Asymmetries in Inflation Expectation Formation Across Demographic Groups," Cambridge Working Papers in Economics 0824, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:0824
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    Cited by:

    1. Christina Strobach & Carin van der Cruijsen, 2015. "The formation of European inflation expectations: One learning rule does not fit all," DNB Working Papers 472, Netherlands Central Bank, Research Department.
    2. repec:wsi:serxxx:v:62:y:2017:i:04:n:s0217590817400306 is not listed on IDEAS
    3. Pfajfar, Damjan & Santoro, Emiliano, 2010. "Heterogeneity, learning and information stickiness in inflation expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 75(3), pages 426-444, September.
    4. Michael J. Lamla & Lena Draeger & 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.
    5. Malka de Castro Campos & Federica Teppa, 2016. "Individual inflation expectations in a declining-inflation environment: Evidence from survey data," DNB Working Papers 508, Netherlands Central Bank, Research Department.
    6. Binder, Carola Conces, 2015. "Whose expectations augment the Phillips curve?," Economics Letters, Elsevier, vol. 136(C), pages 35-38.
    7. 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.
    8. David G. Blanchflower & Conall MacCoille, 2009. "The formation of inflation expectations: an empirical analysis for the UK," NBER Working Papers 15388, National Bureau of Economic Research, Inc.
    9. Michael Ehrmann & Damjan Pfajfar & Emiliano Santoro, 2017. "Consumers' Attitudes and Their Inflation Expectations," International Journal of Central Banking, International Journal of Central Banking, vol. 13(1), pages 225-259, February.
    10. Pfajfar, Damjan, 2013. "Formation of rationally heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1434-1452.
    11. Menz, Jan-Oliver & Poppitz, Philipp, 2013. "Households' disagreement on inflation expectations and socioeconomic media exposure in Germany," Discussion Papers 27/2013, Deutsche Bundesbank.
    12. Dräger, Lena & Lamla, Michael J. & Pfajfar, Damjan, 2016. "Are survey expectations theory-consistent? The role of central bank communication and news," European Economic Review, Elsevier, vol. 85(C), pages 84-111.
    13. Ueno, Yuko, 2014. "Updating Behavior of Inflation Expectations: Evidence from Japanese Household Panel Data," CIS Discussion paper series 617, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
    14. Seppo Honkapohja & Arja H. Turunen-Red & Alan D. Woodland, 2016. "Growth, expectations and tariffs," Canadian Journal of Economics, Canadian Economics Association, vol. 49(4), pages 1441-1469, November.
    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, University of Hamburg, Department of Socioeconomics.
    16. Yamamoto, Ryuichi & Hirata, Hideaki, 2013. "Strategy switching in the Japanese stock market," Journal of Economic Dynamics and Control, Elsevier, vol. 37(10), pages 2010-2022.
    17. Emiliano Santoro & Damjan Pfajfar, 2006. "Heterogeneity and learning in inflation expectation formation: an empirical assessment," Department of Economics Working Papers 0607, Department of Economics, University of Trento, Italia.
    18. Balazs VARGA & Zsolt DARVAS, "undated". "Time-Varying Coefficient Methods to Measure Inflation Persistence," EcoMod2010 259600167, EcoMod.
    19. Böhl, Gregor & Fischer, Thomas, 2017. "Can taxation predict US top-wealth share dynamics?," IMFS Working Paper Series 118, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    20. 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.
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    More about this item

    Keywords

    Heterogeneous Expectations; Adaptive Learning; Survey Expectations.;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • J10 - Labor and Demographic Economics - - Demographic Economics - - - General

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