Belief Distortions and Disagreement about Inflation

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

No 423478673, Working Papers from Lancaster University Management School, Economics Department

Abstract: This paper investigates the macroeconomic effects of a belief distortion shock—an unexpected increase in the wedge between household and professional forecaster inflation expectations. Using survey and macro data alongside machine-learning techniques, we identify this shock and examine its effects within and outside the ZLB, while conditioning on the degree of inflation disagreement. The shock increases unemployment during normal times, whereas it reduces it in the ZLB, when the monetary stance is accommodative. Inflation disagreement instead dampens the expansionary effects of the shock. A New Keynesian model with belief distortion shocks replicates these dynamics and reproduces the inflation disagreement empirical patterns.

Keywords: Inflation; Belief Distortion Shock; Inflation Disagreement; 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-for and nep-mon
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