Expectation formation in a new environment: Evidence from the German reunification

Olga Goldfayn-Frank and Johannes Wohlfart

Journal of Monetary Economics, 2020, vol. 115, issue C, 301-320

Abstract: Exploiting the German reunification, we study how households adapt to a new environment in their macroeconomic forecasting. East Germans expect higher inflation than West Germans decades after reunification. These differences are likely driven by the persistent effect of the inflation shock after reunification, which contrasted strongly with experiences of zero inflation in the GDR. East Germans’ higher inflation expectations are reflected in higher consumer debt and lower bond holdings. Our findings suggest that large changes in the environment can permanently impede people’s ability to form expectations, with an important role for the interaction of experiences before and after the event.

Keywords: Expectation formation; Inflation; Natural experiment; German reunification; Macroeconomic experiences (search for similar items in EconPapers)
JEL-codes: D12 D14 D83 D84 E66 E71 G11 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (62)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:115:y:2020:i:c:p:301-320

DOI: 10.1016/j.jmoneco.2019.08.001

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