Inflation as a 'bad', heuristics and aggregate shocks: New evidence on expectation formation

Sarantis Tsiaplias

Melbourne Institute Working Paper Series from Melbourne Institute of Applied Economic and Social Research, The University of Melbourne

Abstract: This paper studies how inflation expectations are formed, how they are influenced by Inflation-as-a-Bad (IAAB) perceptions, and how these perceptions relate to economic shocks. IAAB perceptions significantly alter inflation expectations, causing spikes, positive bias, and deviations from the Phillips Curve. These perceptions have a distinct impact from canonical properties such as information rigidities, over-reaction, and rationality, which fail to adequately characterize consumer inflation expectations. A model combining rational expectations, information frictions, and consumer heuristics effectively explains the time-variation in the inflation expectations of 365,000 consumers.

Keywords: inflation expectations; inflationary dynamics; aggregate shocks; information rigidities; rationality (search for similar items in EconPapers)
JEL-codes: D84 E31 E52 E71 (search for similar items in EconPapers)
Pages: 45pp
Date: 2024-05
New Economics Papers: this item is included in nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:iae:iaewps:wp2024n03

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