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Heterogeneous inflation expectations and learning

  • Madeira, Carlos


    (Central Bank of Chile)

  • Zafar, Basit

    (Federal Reserve Bank of New York)

Using the panel component of the Michigan Survey of Consumers, we estimate a learning model of inflation expectations, allowing for heterogeneous use of both private information and lifetime inflation experience. “Life-experience inflation” has a significant impact on individual expectations, but only for one-year-ahead inflation. Public information is substantially more relevant for longer-horizon expectations. Even controlling for life-experience inflation and public information, idiosyncratic information explains a nontrivial proportion of the inflation forecasts of agents. We find that women, ethnic minorities, and less educated agents—groups with perennially high inflation expectations—have a higher degree of heterogeneity in their idiosyncratic information and give less importance to recent movements in inflation. During the 1990s and early 2000s, consumers have believed inflation to be more persistent in the short term. However, quarterly inflation fluctuations have a smaller effect on long-term inflation expectations, especially in recent years, suggesting that agents believe shocks to be temporary.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 536.

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Length: 37 pages
Date of creation: 2012
Date of revision: 01 Jun 2014
Handle: RePEc:fip:fednsr:536
Note: Previous title: “Heterogeneous Inflation Expectations, Learning, and Market Outcomes” For a published version of this report, see Carlos Madeira and Basit Zafar, "Heterogeneous Inflation Expectations and Learning," Journal of Money, Credit and Banking 47, no. 5 (August 2015): 867-96.
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