Inflation uncertainty and inflation expectations: Micro-level evidence from the eurozone

Konstantinos Drakos, Panagiotis Th. Konstantinou and Foteini-Anna Thoma

The Journal of Economic Asymmetries, 2020, vol. 21, issue C

Abstract: This paper investigates the evolution of consumers’ inflation expectation. Using Eurobarometer survey data, we estimate models of the probability and the size of “forecast failure” of inflation forecasts. We document that higher inflation uncertainty, higher lagged inflation rates and increased inflation news volume reduce both the probability of failing to predict the correct inflation trajectory and the probability of making large forecast errors – in line with models featuring rational forecasting and sticky information. Furthermore, when the volatility of shocks to inflation increases, individuals tend to make incorrect inflation forecasts as well as large forecast ‘mistakes’, consistent with models featuring asymmetric loss functions. We also document heterogeneity in expectation formation related to demographic characteristics of respondents such as age, gender or education.

Keywords: Survey data; Inflation expectations; Rational forecasts; Rational inattention models; Sticky information models; Asymmetric news media effect; Discrete choice models (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:joecas:v:21:y:2020:i:c:s1703494919300891

DOI: 10.1016/j.jeca.2019.e00150

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