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Imperfect information and inflation expectations

Author

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  • Lena Draeger
  • Michael J. Lamla

Abstract

We investigate the updating behavior of individual consumers regarding their shortand long-run inflation expectations. Utilizing the University of Michigan Survey of Consumer's rotating panel microstructure, we can identify whether individuals adjust their inflation expectations over a period of six months. We find evidence that the updating frequency has been underestimated. Furthermore, looking at the possible determinants of an update we find support for imperfect information models. Moreover, individual expectations are found to be more accurate after an update and forecast accuracy is affected by inflation volatility measures and news regarding inflation. Finally, the updating frequency is found to significantly move spreads in bond markets.

Suggested Citation

  • Lena Draeger & Michael J. Lamla, 2013. "Imperfect information and inflation expectations," KOF Working papers 13-329, KOF Swiss Economic Institute, ETH Zurich.
    • Handle: RePEc:kof:wpskof:13-329
    DOI: 10.3929/ethz-a-007611525
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    Keywords

    Rational Inattention; Updating inflation expectations; Microdata; News;
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