Aggregate Implications of Heterogeneous Inflation Expectations: The Role of Individual Experience

Mathieu Pedemonte, Hiroshi Toma and Esteban Verdugo

No 14068, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: We explore the implications of heterogeneous, history-dependent inflation expectations in a general equilibrium setting. We propose an experience-based expectations-augmented Kalman filter to represent consumers' heterogeneous inflation expectations, where heterogeneity arises from an anchoring-to-the-past mechanism. Using survey data, we show that the model replicates US consumers' inflation expectations and their heterogeneity across cohorts. We introduce this mechanism into a New Keynesian model and find that heterogeneous expectations anchor aggregate responses to the agents' inflation history, producing sluggish expectations dynamics. Central banks should be active to prevent inflationary episodes that agents will remember far into the future.

Keywords: Belief formation; Heterogeneous expectations; survey data; Overextrapolation (search for similar items in EconPapers)
JEL-codes: D84 E31 E58 E71 (search for similar items in EconPapers)
Date: 2025-04
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Persistent link: https://EconPapers.repec.org/RePEc:idb:brikps:14068

DOI: 10.18235/0013495

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