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How Inflation Expectations De-Anchor: The Role of Selective Memory Cues

Nicola Gennaioli, Marta Leva, Raphael Schoenle and Andrei Shleifer

No 32633, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In a model of memory and selective recall, household inflation expectations remain rigid when inflation is anchored but exhibit sharp instability during inflation surges, as similarity prompts retrieval of forgotten high-inflation experiences. Using data from the New York Fed’s Survey of Consumer Expectations and the University of Michigan’s Consumer Survey, we show that similarity can quantitatively account for the sharp post-pandemic rise in inflation expectations, particularly among the elderly. The memory-based model also accounts for how people estimate future inflation ranges and why they neglect infrequent experiences when forming point expectations. These predictions are likewise supported by the data.

JEL-codes: D9 E03 E31 (search for similar items in EconPapers)
Date: 2024-06
New Economics Papers: this item is included in nep-mon
Note: EFG ME
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Citations: View citations in EconPapers (3)

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