Inflation Expectations with Finite Horizon Planning

Christopher Gust, Edward Herbst and David Lopez-Salido

No 2024-063, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Under finite horizon planning, households and firms evaluate a full set of state-contingent paths along which the economy might evolve out to a finite horizon but have limited ability to process events beyond that horizon. We show--analytically and empirically--that such a model accounts for an initial underreaction and subsequent overreaction of inflation forecasts. A planning horizon of four quarters can account for the evidence on the predictability of inflation forecast errors and macroeconomic data. Our identification and estimation strategies combine full-information methods based on aggregate data with regression-based estimates that directly use inflation expectations data.

Keywords: Finite horizon planning; Inflation expectations; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: C11 E52 E70 (search for similar items in EconPapers)
Pages: 49 p.
Date: 2024-08-09
New Economics Papers: this item is included in nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.federalreserve.gov/econres/feds/files/2024063pap.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2024-63

DOI: 10.17016/FEDS.2024.063

Access Statistics for this paper

More papers in Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().