A Naïve Sticky Information Model of Households’ Inflation Expectations
Arto Luoma and
MPRA Paper from University Library of Munich, Germany
This paper provides a simple epidemiology model where households, when forming their inflation expectations, rationally adopt the past release of inflation with certain probability rather than the forward-looking newspaper forecast as suggested in Carroll [2003, Macroeconomic Expectations of Households and Professional Forecasters, Quarterly Journal of Economics, 118, 269-298]. The posterior model probabilities based on the Michigan survey data strongly support the proposed model. We also extend the agent-based epidemiology model by deriving for it a simple adaptation, which is suitable for estimation. Our results show that this model is able to capture the heterogeneity in households’ expectations very well.
Keywords: Inflation expectations; heterogeneous expectations; survey expectations; sticky information; Bayesian analysis (search for similar items in EconPapers)
JEL-codes: C11 C53 C82 D84 E31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mac
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Journal Article: A naïve sticky information model of households' inflation expectations (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:8663
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