An Estimated Model of Household Inflation Expectations:Information Frictions and Implications

Research output: Working paper

Abstract

This paper proposes and estimates a dynamic model of household inflation expectations. The information flow constraint of the household leads to costly information monitoring. Households use a Bayesian learning model to form and update inflation expectations. The model identifies and corrects for sizable reporting and sampling errors prevalent in household surveys. The estimates show that better-educated households track inflation more closely and report their expectations more accurately. Household inflation expectations are less responsive to changes in the inflation target after the Great Recession. Model-implied household inflation expectations improve the fit of the expectation-augmented Phillips curve. Inattention from households makes it more costly for the Fed to lower inflation than would be the case if everyone is perfectly informed.
Original languageEnglish (US)
Number of pages45
StatePublished - Nov 2019
Externally publishedYes

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