Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication

Lena Dräger, Michael Lamla and Damjan Pfajfar

No 201401, Macroeconomics and Finance Series from University of Hamburg, Department of Socioeconomics

Abstract: Using the microdata of the Michigan Survey of Consumers, we evaluate whether U.S. consumers form macroeconomic expectations consistent with different economic concepts, namely the Phillips curve, the Taylor rule and the Income Fisher equation. We observe that 50% of the surveyed population have expectations consistent with the Income Fisher equation, 46% consistent with the Taylor rule and 34% are in line with the Phillips curve. However, only 6% of consumers form theory-consistent expectations with respect to all three concepts. For the Taylor rule and the Phillips curve we observe a cyclical pattern. For all three concepts we find significant differences across demographic groups. Evaluating determinants of consistency, we provide evidence that consumers are less consistent with the Phillips curve and the Taylor rule during recessions and with inflation higher than 2%. Moreover, consistency with respect to all three concepts is affected by changes in the communication policy of the Fed, where the strongest positive effect on consistency comes from the introduction of the official inflation target. Finally, consumers with theory- consistent expectations have lower absolute inflation forecast errors and are closer to professionals' inflation forecasts.

Keywords: Macroeconomic expectations; microdata; macroeconomic literacy; central bank communication; consumer forecast accuracy. (search for similar items in EconPapers)
JEL-codes: C25 D84 E31 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2014-01
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://www.wiso.uni-hamburg.de/repec/hepdoc/macppr_1_2014.pdf First version, 2014 (application/pdf)

Related works:
Working Paper: Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication (2015)
Working Paper: Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication (2013)
Working Paper: Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication (2013)
Working Paper: Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication (2013)
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