When Bad News Breeds Bias: Cross-country Evidence from Households' Inflation Expectations

Martin Geiger (), Iacovos Sterghides () and Marios Zachariadis ()
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Martin Geiger: Liechtenstein Institute and University of Innsbruck
Iacovos Sterghides: Central Bank of Cyprus
Marios Zachariadis: University of Cyprus

No 2026-3, Working Papers from Central Bank of Cyprus

Abstract: Utilizing a large household-level dataset of inflation expectations for twelve euro-area economies, we attempt to assess the formation and accuracy of inflation expectations following major disruptions of the macroeconomy which we identify during the period from 2004:1 to 2025:2. We find that the arrival of such adverse events tends to increase the degree of inaccuracy in inflation expectations. We also find that this happens because inflation expectations tend to go up in response to these adverse shocks relative to the 12-month ahead inflation realizations, which offers direct evidence of households overestimating inflation. This is consistent with overreaction of inflation expectations in response to inflationary news and with inflation-as-a-bad behavioral patterns in response to adverse non-inflationary shocks. We infer that such behavioral forces appear to have played an important role in the formation of inflation expectations in the euro-area following adverse shocks during the past two decades.

Keywords: forecast errors; shocks; behavioral; belief heterogeneity; Central Bank communication (search for similar items in EconPapers)
JEL-codes: D84 E31 E70 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2026-10
New Economics Papers: this item is included in nep-cba and nep-mon
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