Rational Bias in Inflation Expectations
Robert Murphy () and
Additional contact information
Adam Rohde: Charles River Associates
Eastern Economic Journal, 2018, vol. 44, issue 1, No 10, 153-171
Abstract This paper argues that individuals may rationally weight price increases for food and energy products differently from their expenditure shares when forming expectations about price inflation. We develop a simple dynamic model of the economy with gradual price adjustment in the core sector and flexible prices in the food and energy sectors. Serial correlation of supply shocks to food and energy allows individuals to gain an understanding about future shocks, possibly making it optimal for individuals to place more weight on the movement of prices in these sectors. We use survey data on expected inflation to show that the weights implied by the model differ from the expenditure shares of food and energy prices in the CPI for the United States. We find food price inflation is weighted more heavily and energy price inflation is weighted less heavily. But importantly, we cannot reject the hypothesis that these weights reflect rational behavior in forming expectations about inflation.
Keywords: inflation expectations; core inflation; food and energy prices; anchored expectations; E30; E31; E58 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed
Downloads: (external link)
http://link.springer.com/10.1057/eej.2015.50 Abstract (text/html)
Access to full text is restricted to subscribers.
Working Paper: Rational Bias in Inflation Expectations (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:pal:easeco:v:44:y:2018:i:1:d:10.1057_eej.2015.50
Ordering information: This journal article can be ordered from
Access Statistics for this article
Eastern Economic Journal is currently edited by Allan Zebedee and Cynthia Bansak
More articles in Eastern Economic Journal from Palgrave Macmillan, Eastern Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().