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Do actions speak louder than words? Household expectations of inflation based on micro consumption data

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  • Inoue, Atsushi
  • Kilian, Lutz
  • Kiraz, Fatma Burcu
Abstract
Survey data on household expectations of inflation are routinely used in economic analysis, yet it is not clear to what extent households are able to articulate their expectations in survey interviews. We propose an alternative approach to recovering households' implicit expectations of inflation from their consumption expenditures. We show that these implicit expectations have predictive power for CPI inflation. They are better predictors of CPI inflation than survey responses, except for highly educated consumers. Moreover, households' implicit inflation expectations respond to inflation news, consistent with recent work on the transmission of information across consumers. The response of consumers' expectations to inflation news tends to increase with their level of education. Our evidence strengthens the case for macroeconomic models with sticky information.

Suggested Citation

  • Inoue, Atsushi & Kilian, Lutz & Kiraz, Fatma Burcu, 2006. "Do actions speak louder than words? Household expectations of inflation based on micro consumption data," Discussion Paper Series 1: Economic Studies 2006,26, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdp1:4755
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    Cited by:

    1. Emily Anderson & Atsushi Inoue & Barbara Rossi, 2016. "Heterogeneous Consumers and Fiscal Policy Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(8), pages 1877-1888, December.
    2. Eda Gulsen & Hakan Kara, 2020. "Formation of inflation expectations: Does macroeconomic and policy environment matter?," Koç University-TUSIAD Economic Research Forum Working Papers 2017, Koc University-TUSIAD Economic Research Forum.
    3. Carrera Cesar, 2012. "Estimating Information Rigidity Using Firms' Survey Data," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-34, June.
    4. Olivier Armantier & Wändi Bruine de Bruin & Giorgio Topa & Wilbert van der Klaauw & Basit Zafar, 2015. "Inflation Expectations And Behavior: Do Survey Respondents Act On Their Beliefs?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56(2), pages 505-536, May.
    5. Menz, Jan-Oliver & Poppitz, Philipp, 2013. "Households' disagreement on inflation expectations and socioeconomic media exposure in Germany," Discussion Papers 27/2013, Deutsche Bundesbank.
    6. Fabio Canova & Luca Gambetti, 2010. "Do Expectations Matter? The Great Moderation Revisited," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(3), pages 183-205, July.
    7. Faust, Jon & Wright, Jonathan H., 2013. "Forecasting Inflation," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 2-56, Elsevier.
    8. Mankiw, N. Gregory & Reis, Ricardo, 2010. "Imperfect Information and Aggregate Supply," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 5, pages 183-229, Elsevier.
    9. Yasutomo Murasawa, 2013. "Measuring Inflation Expectations Using Interval-Coded Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 75(4), pages 602-623, August.
    10. Yavari, Kazem & Najjarzade, Reza & Tavakolian, Hossein & Bahador, Ali, 2016. "Effect of Nominal Exchange Rate Volatility on Output in Iran’s Economy," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 11(4), pages 419-442, October.
    11. Lutz Kilian, 2013. "Structural vector autoregressions," Chapters, in: Nigar Hashimzade & Michael A. Thornton (ed.), Handbook of Research Methods and Applications in Empirical Macroeconomics, chapter 22, pages 515-554, Edward Elgar Publishing.
    12. Michael J. Lamla & Sarah Lein, 2010. "The Euro Cash Changeover, Inflation Perceptions and the Media," KOF Working papers 10-254, KOF Swiss Economic Institute, ETH Zurich.
    13. Gbaguidi, David, 2012. "La courbe de Phillips : temps d’arbitrage et/ou arbitrage de temps," L'Actualité Economique, Société Canadienne de Science Economique, vol. 88(1), pages 87-119, mars.

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    More about this item

    Keywords

    Inflation Expectations; Consumer Expenditure Survey; Michigan Survey of Consumers; Survey of Professional Forecasters; Euler Equation;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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