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The Mechanism of Inflation Expectation Formation among Consumers


  • Naohito Abe

    (Institute of Economic Research Hitotsubashi University)

  • Yuko Ueno

    (Institute of Economic Research Hitotsubashi University)


How do we determine our expectations of inflation? Because inflation expectations greatly influence the economy, researchers have long considered this question. Using a survey with randomized experiments among 15,000 consumers, we investigate the mechanism of inflation expectation formation. Learning theory predicts that once people obtain new information on future inflation, they change their expectations. In this regard, such expectations are the weighted average of prior belief and information. We confirm that the weight for prior belief is a decreasing function of the degree of uncertainty. Our results also show that monetary authority information affects consumers to a greater extent when expectations are updated. With such information, consumers change their inflation expectations by 32% from the average. This finding supports improvements to monetary policy publicity.

Suggested Citation

  • Naohito Abe & Yuko Ueno, 2016. "The Mechanism of Inflation Expectation Formation among Consumers," UTokyo Price Project Working Paper Series 064, University of Tokyo, Graduate School of Economics.
  • Handle: RePEc:upd:utppwp:064

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    Cited by:

    1. repec:eee:jjieco:v:46:y:2017:i:c:p:53-68 is not listed on IDEAS
    2. Rodolfo Arioli & Colm Bates & Heinz Dieden & Ioana Duca & Roberta Friz & Christian Gayer & Geoff Kenny & Aidan Meyler & Iskra Pavlova, 2016. "EU Consumers’ Quantitative Inflation Perceptions and Expectations: An Evaluation," European Economy - Discussion Papers 2015 - 038, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    3. Hattori, Masazumi & Yetman, James, 2017. "The evolution of inflation expectations in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 46(C), pages 53-68.

    More about this item


    inflation expectations; Bayesian updating; rational expectation; randomized survey experiments.;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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