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Economic literacy and inflation expectations: evidence from a laboratory experiment

  • Mary A. Burke
  • Michael Manz

We present new experimental evidence on heterogeneity in the formation of inflation expectations and relate the variation to economic literacy and demographics. The experimental design allows us to investigate two channels through which expectations-formation may vary across individuals: (1) the choice of information and (2) the use of given information. Subjects who are more economically literate perform better along both dimensions—they choose more-relevant information and make better use of given information. Compared with survey data on inflation expectations, fewer demographic factors are associated with variation in inflation expectations, and economic literacy in most cases accounts for demographic variation in expectations.

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Paper provided by Federal Reserve Bank of Boston in its series Public Policy Discussion Paper with number 11-8.

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Date of creation: 2011
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Handle: RePEc:fip:fedbpp:11-8
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  1. Hey, John D., 1994. "Expectations formation: Rational or adaptive or ...?," Journal of Economic Behavior & Organization, Elsevier, vol. 25(3), pages 329-349, December.
  2. Gerald P. Dwyer, Jr. & Arlington W. Williams & Raymond Battalio & Timothy Mason, 1989. "Tests of rational expectations in a stark setting," Working Papers 1989-001, Federal Reserve Bank of St. Louis.
  3. Otwin Becker & Johannes Leitner & Ulrike Leopold-Wildburger, 2009. "Expectation formation and regime switches," Experimental Economics, Springer, vol. 12(3), pages 350-364, September.
  4. Pfajfar, Damjan & Žakelj, Blaž, 2014. "Experimental evidence on inflation expectation formation," Journal of Economic Dynamics and Control, Elsevier, vol. 44(C), pages 147-168.
  5. Maarten vanRooij & Annamaria Lusardi & Rob Alessie, 2007. "Financial Literacy and Stock Market Participation," Working Papers wp162, University of Michigan, Michigan Retirement Research Center.
  6. Adam, Klaus, 2005. "Experimental Evidence on the Persistence of Output and Inflation," CEPR Discussion Papers 4885, C.E.P.R. Discussion Papers.
  7. Olivier Armantier & Wändi Bruine de Bruin & Giorgio Topa & Wilbert van der Klaauw & Basit Zafar, 2011. "Inflation expectations and behavior: Do survey respondents act on their beliefs?," Staff Reports 509, Federal Reserve Bank of New York.
  8. Christopher D Carroll, 2002. "Macroeconomic Expectations of Households and Professional Forecasters," Economics Working Paper Archive 477, The Johns Hopkins University,Department of Economics.
  9. Bergmann, Barbara R., 1988. "An experiment on the formation of expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 9(2), pages 137-151, March.
  10. Jonung, Lars, 1981. "Perceived and Expected Rates of Inflation in Sweden," American Economic Review, American Economic Association, vol. 71(5), pages 961-68, December.
  11. 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.
  12. Marimon, R. & Sunder, S., 1995. "Does a Constant Money Growth Rule Help Stabilize Inflation?: Experimental Evidence," GSIA Working Papers 1995-04, Carnegie Mellon University, Tepper School of Business.
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