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Belief Distortions and Disagreement about Inflation

Author

Listed:
  • Stefano Fasani
  • Valeria Patella
  • Giuseppe Pagano Giorgianni
  • Lorenza Rossi

Abstract

This paper investigates the macroeconomic effects of a belief distortion shock—an unexpected increase in the wedge between household and professional forecaster inflation expectations. Using survey and macro data alongside machine-learning techniques, we identify this shock and examine its effects within and outside the ZLB, while conditioning on the degree of inflation disagreement. The shock increases unemployment during normal times, whereas it reduces it in the ZLB, when the monetary stance is accommodative. Inflation disagreement instead dampens the expansionary effects of the shock. A New Keynesian model with belief distortion shocks replicates these dynamics and reproduces the inflation disagreement empirical patterns.

Suggested Citation

  • Stefano Fasani & Valeria Patella & Giuseppe Pagano Giorgianni & Lorenza Rossi, 2025. "Belief Distortions and Disagreement about Inflation," Working Papers 423478673, Lancaster University Management School, Economics Department.
    • Handle: RePEc:lan:wpaper:423478673
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    File URL: http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/LancasterWP2025_007.pdf
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    More about this item

    Keywords

    Inflation; Belief Distortion Shock; Inflation Disagreement; Households Expectation; Machine Learning; Local Projections; New Keynesian model; Monetary Policy; ZLB;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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