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The Mechanism of Inflation Expectation Formation among Consumers

Listed author(s):
  • Naohito Abe

    (Institute of Economic Research Hitotsubashi University)

  • Yuko Ueno

    (Institute of Economic Research Hitotsubashi University)

Registered author(s):

    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.

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    File URL: http://www.price.e.u-tokyo.ac.jp/img/researchdata/pdf/p_wp082.pdf
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    Paper provided by University of Tokyo, Graduate School of Economics in its series UTokyo Price Project Working Paper Series with number 064.

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    Length: 48 pages
    Date of creation: Mar 2016
    Handle: RePEc:upd:utppwp:064
    Contact details of provider: Postal:
    University of Tokyo 702 Faculty of Economics, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo, 113-0033, Japan

    Phone: +81-3-3812-2111
    Web page: http://www.e.u-tokyo.ac.jp/
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    1. N. Gregory Mankiw & Ricardo Reis & Justin Wolfers, 2004. "Disagreement about Inflation Expectations," NBER Chapters,in: NBER Macroeconomics Annual 2003, Volume 18, pages 209-270 National Bureau of Economic Research, Inc.
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    12. Wändi Bruine De Bruin & Charles F. Manski & Giorgio Topa & Wilbert van der Klaauw, 2011. "Measuring consumer uncertainty about future inflation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(3), pages 454-478, April.
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