Belief distortions and Disagreement about Inflation

Giuseppe Pagano Giorgianni and Valeria Patella

No 256, Working Papers in Public Economics from Department of Economics and Law, Sapienza University of Roma

Abstract: Disagreement in inflation expectations amplifies inflation and lowers unemployment when beliefs are systematically upward-biased. Using the 1-year-ahead inflation forecast microdata from the Michigan Survey of Consumers, we employ a NK-Phillips curve framework and compute local projections on the contribution of inflation beliefs' distributions to inflation, in response to a belief distortion shock. They reveal that higher expected inflation leads firms to overreact by raising prices, when the shock is less informative and expectations are more dispersed. Hence, a weak consensus prompts confident, sentiment-driven expectations, and firms' expansionary behaviors, reducing unemployment and sustaining production. Conversely, a strong and more informative consensus about future inflationary outcomes fosters contractionary adjustments, increasing unemployment, and easing the labor market.

Keywords: Inflation; Belief Formation; Heterogeneous Agents; Survey Expectation Microdata; NK Phillips Curve; Functional Data Analysis; Local Projections (search for similar items in EconPapers)
JEL-codes: C22 C32 D84 E31 (search for similar items in EconPapers)
Pages: 82
Date: 2025-02
New Economics Papers: this item is included in nep-inv and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.dipecodir.it/wpsap/data/wp256.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sap:wpaper:wp256

Access Statistics for this paper

More papers in Working Papers in Public Economics from Department of Economics and Law, Sapienza University of Roma
Bibliographic data for series maintained by Luisa Giuriato ().