Belief Distortions and Uncertainty About Inflation

Stefano Fasani, Giuseppe Pagano Giorgianni, Valeria Patella and Lorenza Rossi

No 12209, CESifo Working Paper Series from CESifo

Abstract: This paper studies the macroeconomic effects of a belief distortion shock—defined as the unexpected component of household inflation expectations after accounting for professional forecasts and observable fundamentals. Using survey data, U.S. macroeconomic variables, and machine-learning methods, we identify this shock and examine its effects both within and outside the zero lower bound (ZLB), conditioning on household inflation uncertainty. The shock raises inflation, uncertainty, and unemployment in normal times. At the ZLB, the shock reduces real interest rates and becomes expansionary; however, the accompanying rise in inflation uncertainty dampens or can even reverse these effects. A New Keynesian model with belief shocks replicates these dynamics and matches the empirical patterns of inflation uncertainty.

Keywords: inflation; belief distortion shock; inflation uncertainty; households expectation; machine learning; local projections; New Keynesian model; monetary policy; ZLB (search for similar items in EconPapers)
JEL-codes: C22 C32 D84 E31 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in 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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