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Learning and subjective beliefs about good and bad inflation ranges

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  • Ghaderi, Mohammad
  • Seo, Sang Byung
  • Shaliastovich, Ivan

Abstract

We identify desirable/undesirable inflation outcomes under subjective beliefs by comparing surveybased and risk-adjusted distributions of inflation. Intuitively, investors dislike inflation at both extremes, preferring a range in the middle. This "good inflation" region, which investors associate with lower-than-average marginal utility, varies substantially over time in position and width, revealing time-varying preferences across inflation ranges. Different ranges contribute to the inflation risk premium with mixed signs, offsetting each other and often masking important insights into the pricing of inflation risk. We rationalize these empirical patterns using a model where investors learn and update beliefs about hidden deflationary and inflationary recession states.

Suggested Citation

  • Ghaderi, Mohammad & Seo, Sang Byung & Shaliastovich, Ivan, 2026. "Learning and subjective beliefs about good and bad inflation ranges," SAFE Working Paper Series 478, Leibniz Institute for Financial Research SAFE.
    • Handle: RePEc:zbw:safewp:340186
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