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Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication

Author

Listed:
  • Lena Dräger

    () (Universität Hamburg (University of Hamburg))

  • Michael J. Lamla

    () (University of Essex and ETH Zurich)

  • Damjan Pfajfar

    () (EBC, CentER, University of Tilburg)

Abstract

Using the microdata of the Michigan Survey of Consumers, we evaluate whether U.S. consumers form macroeconomic expectations consistent with different economic concepts, namely the Phillips curve, the Taylor rule and the Income Fisher equation. We observe that 50% of the surveyed population have expectations consistent with the Income Fisher equation, 46% consistent with the Taylor rule and 34% are in line with the Phillips curve. However, only 6% of consumers form theory-consistent expectations with respect to all three concepts. For the Taylor rule and the Phillips curve we observe a cyclical pattern. For all three concepts we find significant differences across demographic groups. Evaluating determinants of consistency, we provide evidence that consumers are less consistent with the Phillips curve and the Taylor rule during recessions and with inflation higher than 2%. Moreover, consistency with respect to all three concepts is affected by changes in the communication policy of the Fed, where the strongest positive effect on consistency comes from the introduction of the official inflation target. Finally, consumers with theory- consistent expectations have lower absolute inflation forecast errors and are closer to professionals' inflation forecasts.

Suggested Citation

  • Lena Dräger & Michael J. Lamla & Damjan Pfajfar, 2014. "Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication," Macroeconomics and Finance Series 201401, University of Hamburg, Department of Socioeconomics.
  • Handle: RePEc:hep:macppr:201401
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    References listed on IDEAS

    as
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    Cited by:

    1. Paul Hubert & Mirza Harun, 2014. "Inflation expectation dynamics: the role of past present and forward looking information," Sciences Po publications 2014-07, Sciences Po.
    2. repec:spo:wpecon:info:hdl:2441/6g0gsihsjmn5snc9pb0hlas97 is not listed on IDEAS
    3. Geiger, Martin & Scharler, Johann, 2016. "How do Macroeconomic Shocks affect Expectations? Lessons from Survey Data," Annual Conference 2016 (Augsburg): Demographic Change 145747, Verein für Socialpolitik / German Economic Association.
    4. Donato Masciandaro & Davide Romelli, 2016. "From Silence to Voice: Monetary Policy, Central Bank Governance and Communication," BAFFI CAREFIN Working Papers 1627, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.

    More about this item

    Keywords

    Macroeconomic expectations; microdata; macroeconomic literacy; central bank communication; consumer forecast accuracy.;

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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