Hostname: page-component-7b7567c8c-wxvwp Total loading time: 0 Render date: 2026-11-14T17:28:25.010Z Has data issue: false hasContentIssue false
  • English
  • Français

STATE-DEPENDENT FORMATION OF INFLATION EXPECTATIONS

Published online by Cambridge University Press:  30 April 2021

Bopjun Gwak
Bopjun Gwak*
Affiliation:
Bank of Korea
*
Address correspondence to: Bopjun Gwak, Bank of Korea, Research Department, Sejong-daero 67, Jung-gu, Seoul, South Korea. e-mail: bopjun.gwak@gmail.com. Phone: +82 2 759 4265.
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the 'Save PDF' action button.

The learning-from-experience model of Malmendier and Nagel [(2016) Quarterly Journal of Economics 131, 53–87] successfully reproduces the heterogeneity in inflation expectations across age groups. However, inflation expectations presumably depend on not only age and experience but also inflation regime. Therefore, this paper proposes an extended learning-from-experience model, in which expectation formation depends on inflation regime. Estimating the model with US data, I find that when inflation is higher and more volatile, households place more weight on recent data when making private forecasts. Moreover, in this regime, households rely more heavily on private forecasts than on public information.

Keywords

Inflation ExpectationsLearning from ExperienceState Dependence

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 8 , December 2022, pp. 1994 - 2028
Copyright
© Cambridge University Press 2021

Footnotes

This study is a part of my Ph.D. dissertation at Goethe University Frankfurt. I would like to thank my advisor Mirko Wiederholt for his advice and encouragement. I am also grateful to Michael Binder, Klaus Wälde, Thomas Otter, Michael Haliassos, Elisabeth Falck, Paul Reimers, Giang Nghiem, Zhuoer Qiu, and seminar participants at Goethe University Frankfurt for valuable comments and suggestions. I appreciate George Evans (Co-editor) and two anonymous referees for constructive discussions and insightful suggestions. All errors are mine.

References

Adam, K., Marcet, A., and Nicolini, J.P. (2016) Stock market volatility and learning. Journal of Finance 71(1), 33–82.Google Scholar
Amisano, G. and Fagan, G. (2013) Money growth and inflation: a regime switching approach. Journal of International Money and Finance 33, 118–145.CrossRefGoogle Scholar
Andrade, P., Crump, R., Eusepi, S., and Moench, E. (2016) Fundamental disagreement. Journal of Monetary Economics 83, 106–128.CrossRefGoogle Scholar
Areosa, W.D. (2015) What Drives Inflation Expectations in Brazil? Public Versus Private Information. BIS Working Papers No. 544.Google Scholar
Arifovic, J., Bullard, J., and Kostyshyna, O. (2013) Social learning and monetary policy rules. Economic Journal 123(567), 38–76.CrossRefGoogle Scholar
Ayuso, J., Kaminsky, G.L., and Lopez-Salido, D. (2003) Inflation regimes and stabilisation policies: Spain 1962–2001. Investigaciones Economicas 27(3), 615–631.Google Scholar
Beechey, M. and Österholm, P. (2012) The rise and fall of U.S. inflation persistence. International Journal of Central Banking 8(3), 55–86.Google Scholar
Berardi, M. (2009) Monetary policy with heterogeneous and misspecified expectations. Journal of Money, Credit, and Banking 41(1), 79–100.CrossRefGoogle Scholar
Berardi, M. and Galimberti, J.K. (2017) Empirical calibration of adaptive learning. Journal of Economic Behavior and Organization 144, 219–237.CrossRefGoogle Scholar
Branch, W.A. and Evans, G.W. (2007) Model uncertainty and endogenous volatility. Review of Economic Dynamics 10(2), 207–237.CrossRefGoogle Scholar
Bray, M. and Savin, N. (1986) Rational expectations equilibria, learning, and model selection. Econometrica 54(5), 1129–1160.CrossRefGoogle Scholar
Busetti, F., Monache, D., Gerali, A., and Locarno, A. (2017) Trust, but Verify. De-anchoring of Inflation Expectations under Learning and Heterogeneity. ECB Working Paper Series No. 1994.Google Scholar
Capistrán, C. and Timmermann, A. (2009) Disagreement and biases in inflation expectations. Journal of Money, Credit, and Banking 41(2–3), 365–396.CrossRefGoogle Scholar
Carceles-Poveda, E. and Giannitsarou, C. (2007) Adaptive learning in practice. Journal of Economic Dynamics and Control 31(8), 2659–2697.CrossRefGoogle Scholar
Caroll, C. (2003) Macroeconomic expectations of households and professional forecasters. The Quarterly Journal of Economics 118(1), 269–298.CrossRefGoogle Scholar
Carrillo, P.E. and Emran, M.S. (2012) Public information and inflation expectations: microeconometric evidence from a natural experiment. The Review of Economics and Statistics 94(4), 860–877.CrossRefGoogle Scholar
Coibion, O. and Gorodnichenko, Y. (2015) Information rigidity and the expectations formation process: a simple framework and new facts. American Economic Review 105(8), 2644–2678.CrossRefGoogle Scholar
Coibion, O., Gorodnichenko, Y., and Kumar, S. (2018) How do firms form their expectations? New survey evidence. American Economic Review 108(9), 2671–2713.CrossRefGoogle Scholar
Coibion, O., Gorodnichenko, Y., Kumar, S., and Pedemonte, M. (2020) Inflation expectations as a policy tool? Journal of International Economics 124, 103297.CrossRefGoogle Scholar
Coibion, O., Gorodnichenko, Y., and Weber, M. (2019) Monetary policy communications and their effects on household inflation expectations. NBER Working Paper No.25482.CrossRefGoogle Scholar
Curtin, R (1996) Procedure to Estimate Price Expectations. Mimeo, University of Michigan Survey Research Center.Google Scholar
Dale, S., Orphanides, A., and Österholm, P. (2011) Imperfect central bank communication: information versus distraction. International Journal of Central Banking 7(2), 3–39.Google Scholar
Evans, G.W. and Honkapohja, S. (1993) Adaptive forecasts, hysteresis, and endogenous fluctuations. Federal Reserve Bank of San Francisco Economic Review 1, 3–13.Google Scholar
Evans, G.W. and Honkapohja, S. (2001) Learning and Expectations in Macroeconomics. Princeton University Press.CrossRefGoogle Scholar
Evans, M. and Wachtel, P. (1993) Inflation regimes and the sources of inflation uncertainty. Journal of Money, Credit, and Banking 25(3), 475–511.CrossRefGoogle Scholar
Fuhrer, J. (2010) Inflation persistence. Handbook of Monetary Economics 3, 423–486.CrossRefGoogle Scholar
Giannone, D., Reichlin, L., and Lenza, M. (2010) Explaining the great moderation: it is not the shocks. Journal of European Economic Association 6(2–3), 621–633.CrossRefGoogle Scholar
Goy, G., Hommes, C., and Mavromatis, K. (2020) Forward guidance and the role of central bank credibility under heterogeneous beliefs. Journal of Economic Behavior and Organization, forthcoming.Google Scholar
Harding, D. and Pagan, A. (2002) Dissecting the cycle: a methodological investigation. Journal of Monetary Economics 49, 365–381.CrossRefGoogle Scholar
Kim, C.J. and Nelson, C. (1999a) State-Space Models with Regime Switching. Cambridge MA: MIT Press.Google Scholar
Kim, C.J. and Nelson, C. (1999b) Has the U.S. economy become more stable? A Bayesian approach based on a Markov-switching model of the business cycle. The Review of Economics and Statistics 81(4), 608–616.CrossRefGoogle Scholar
Maćkowiak, B. and Wiederholt, M. (2009) Optimal sticky prices under rational inattention. American Economic Review 99, 769–803.CrossRefGoogle Scholar
Madeira, C. and Zafar, B. (2015) Heterogeneous inflation expectations and learning. Journal of Money, Credit, and Banking 47(5), 867–896.CrossRefGoogle Scholar
Malmendier, U. and Nagel, S. (2016) Learning from inflation experiences. The Quarterly Journal of Economics 131(1), 53–87.CrossRefGoogle Scholar
Mankiw, N.G., Reis, G., and Wolfers, J. (2004) Disagreement about inflation expectations. NBER Macroeconomics Annual 18, 209–248.CrossRefGoogle Scholar
Marcet, A. and Nicolini, J.P. (2003) Recurrent hyperinflations and learning. American Economic Review 93(5), 1476–1498.CrossRefGoogle Scholar
Marcet, A. and Sargent, T. (1989) Convergence of least squares learning mechanisms in self-referential linear stochastic models. Journal of Economic Theory 48, 337–368.CrossRefGoogle Scholar
Mertens, E. and Nason, J.M. (2020) Inflation and professional forecast dynamics: an evaluation of stickiness, persistence, and volatility. Quantitative Economics 11(4), 1485–1520.CrossRefGoogle Scholar
Milani, F. (2007) Expectations, learning and macroeconomic persistence. Journal of Monetary Economics 54, 2065–2082.CrossRefGoogle Scholar
Milani, F. (2014) Learning and time-varying macroeconomic volatility. Journal of Economic Dynamics and Control 47, 94–114.CrossRefGoogle Scholar
Morris, S. and Shin, H.S. (2002) Social value of public information. American Economic Review 92(5), 1521–1534.CrossRefGoogle Scholar
Muto, I. (2011) Monetary policy and learning from the central bank’s forecast. Journal of Economic Dynamics and Control 35, 52–66.CrossRefGoogle Scholar
Nakov, A. and Nuño, G. (2015) Learning from experience in the stock market. Journal of Economic Dynamics and Control 52, 224–239.CrossRefGoogle Scholar
Orphanides, A. and Williams, J.C. (2005) Imperfect knowledge, inflation expectations, and monetary policy. The Inflation Targeting Debate, The University of Chicago Press.CrossRefGoogle Scholar
Patton, A. and Timmermann, A. (2010) Why do forecasters disagree? Lessons from the term structure of cross-sectional dispersion. Journal of Monetary Economics 57, 803–820.CrossRefGoogle Scholar
Pesaran, M.H. and Timmermann, A. (2007) Selection of estimation window in the presence of breaks. Journal of Econometrics 137, 134–161.CrossRefGoogle Scholar
Sargent, T. (1993) Bounded Rationality in Macroeconomics. Oxford University Press.Google Scholar
Timmermann, A. (2006) Forecast Combinations. Handbook of Economic Forecasting 1, Elsevier, 135–196.CrossRefGoogle Scholar
Vellekoop, N. and Wiederholt, M. (2019) Inflation expectations and choices of households. SAFE Working Paper No. 250.CrossRefGoogle Scholar