Households’ subjective expectations: disagreement, common drivers and reaction to monetary policy

Clodomiro Ferreira and Stefano Pica
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Clodomiro Ferreira: BANCO DE ESPAÑA
Stefano Pica: BANK OF ITALY

No 2445, Working Papers from Banco de España

Abstract: Using granular data on household subjective expectations for several countries, we uncover a robust positive reaction of inflation expectations to a contractionary monetary policy shock, a result at odds with standard equilibrium theories with nominal rigidities. We then investigate what lies behind such result. Although households disagree, their expectations are correlated in the cross-section. Two principal components account for a significant portion of the variance of all expectations. These components capture households’ perceptions of the sources of macroeconomic dynamics, with the first capturing either a supply-side view or an overall dislike for inflation, and the second component reflecting a perception about demand pressures. This structure of disagreement is stable across countries and over time and does not vary with demographic or socioeconomic characteristics. We then use these insights to identify two common factors driving expectations over time. These factors are consistent with a narrative based on perceived supply-side inflationary pressures after the invasion of Ukraine in February 2022, as well as with the overall downward inflation dynamics intensified by the reaction of the ECB.

Keywords: survey; expectations; disagreement; monetary policy (search for similar items in EconPapers)
JEL-codes: D1 D8 E2 E3 (search for similar items in EconPapers)
Pages: 83 pages
Date: 2024-11
New Economics Papers: this item is included in nep-cba, nep-cis, nep-eec and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2445

DOI: 10.53479/38316

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