When Bad News Breeds Bias: Cross-country Evidence on Inflation-as-a-Bad and Overreaction in Inflation Expectations

Martin Geiger, Iacovos Sterghides and Marios Zachariadis

University of Cyprus Working Papers in Economics from University of Cyprus Department of Economics

Abstract: Utilizing a very 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 2025:02. We find that these adverse events tend 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 shocks relative to the 12-month ahead inflation realizations, which offers direct evidence of overestimation of 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 biases 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; behavioral bias; macroeconomic shocks. (search for similar items in EconPapers)
JEL-codes: D84 E31 E70 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2025-11-18
New Economics Papers: this item is included in nep-bec, nep-for and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:ucy:cypeua:04-2025

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