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Disagreement about Inflation Expectations

Author

Listed:
  • N. Gregory Mankiw

    (Harvard University, Faculty of Arts and Sciences, Department of Economics)

  • Ricardo Augusto Marc Rocha Reis

    (Harvard University, Department of Economics)

  • Justin Wolfers

    (Stanford University, Graduate School of Business)

Abstract

Analyzing 50 years of inflation expectations data from several sources, we document substantial disagreement among both consumers and professional economists about expected future inflation. Moreover, this disagreement shows substantial variation through time, moving with inflation, the absolute value of the change in inflation, and relative price variability. We argue that a satisfactory model of economic dynamics must speak to these important business cycle moments. Noting that most macroeconomic models do not endogenously generate disagreement, we show that a simple "sticky-information" model broadly matches many of these facts. Moreover, the sticky-information model is consistent with other observed departures of inflation expectations from full rationality, including autocorrelated forecast errors and insufficient sensitivity to recent macroeconomic news.

Suggested Citation

  • N. Gregory Mankiw & Ricardo Augusto Marc Rocha Reis & Justin Wolfers, 2004. "Disagreement about Inflation Expectations," Yale School of Management Working Papers ysm391, Yale School of Management.
    • Handle: RePEc:ysm:somwrk:ysm391
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    File URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=417602
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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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