STATE-DEPENDENT FORMATION OF INFLATION EXPECTATIONS

Bopjun Gwak

Macroeconomic Dynamics, 2022, vol. 26, issue 8, 1994-2028

Abstract: The learning-from-experience model of Malmendier and Nagel [(2016) Quarterly Journal of Economics 131, 53–87] successfully reproduces the heterogeneity in inflation expectations across age groups. However, inflation expectations presumably depend on not only age and experience but also inflation regime. Therefore, this paper proposes an extended learning-from-experience model, in which expectation formation depends on inflation regime. Estimating the model with US data, I find that when inflation is higher and more volatile, households place more weight on recent data when making private forecasts. Moreover, in this regime, households rely more heavily on private forecasts than on public information.

Date: 2022
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