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Revisiting the inflation perception conundrum

Kim Abildgren and Andreas Kuchler

Journal of Macroeconomics, 2021, vol. 67, issue C

Abstract: Households' inflation perceptions and expectations play a key role in many dynamic macroeconomic and monetary models and are important for the ability of central banks to reach their objective of price stability. This paper revisits the issue of overestimation bias in inflation perceptions and expectations based on new and unique microdata from the Danish part of the EU-Harmonised Consumer Expectations Survey linked to rich household-level data from administrative registers. The analysis shows that accounting for even several of the household characteristics and social gradients usually addressed in the literature is far from sufficient to explain the inflation perception bias. Furthermore, we find that respondents participating in the survey more than once tend to be persistent in their degree of perception bias and that overpessimistic households have larger perception bias than other households. This indicates that inflation perception bias is related to fundamental personality traits. Finally, households' expectations of the future inflation level tend to be mean reverting and associated with the same types of bias as inflation perceptions.

Keywords: Inflation perceptions; Inflation expectations; Microdata (search for similar items in EconPapers)
JEL-codes: D12 E31 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jmacro.2020.103264

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