The Mechanism of Inflation Expectation Formation among Consumers

Naohito Abe and Yuko Ueno
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Naohito Abe: Institute of Economic Research Hitotsubashi University
Yuko Ueno: Institute of Economic Research Hitotsubashi University

No 64, UTokyo Price Project Working Paper Series from University of Tokyo, Graduate School of Economics

Abstract: How do we determine our expectations of inflation? Because inflation expectations greatly influence the economy, researchers have long considered this question. Using a survey with randomized experiments among 15,000 consumers, we investigate the mechanism of inflation expectation formation. Learning theory predicts that once people obtain new information on future inflation, they change their expectations. In this regard, such expectations are the weighted average of prior belief and information. We confirm that the weight for prior belief is a decreasing function of the degree of uncertainty. Our results also show that monetary authority information affects consumers to a greater extent when expectations are updated. With such information, consumers change their inflation expectations by 32% from the average. This finding supports improvements to monetary policy publicity.

Keywords: inflation expectations; Bayesian updating; rational expectation; randomized survey experiments. (search for similar items in EconPapers)
JEL-codes: C81 D80 E31 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2016-03
New Economics Papers: this item is included in nep-cba, nep-exp, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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