Asymmetries in Inflation Expectation Formation Across Demographic Groups

Damjan Pfajfar and Emiliano Santoro

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: Relying on University of Michigan data on consumers.in.ation expectations, we establish some stylized facts on the process of in.ation expectation formation across different demographic groups. Percentile time series models are employed to test for rationality and to study learning dynamics across the whole cross-sectional spectrum of responses. These display a significant degree of heterogeneity and asymmetry. Income, education, and gender seem to be rather important characteristics when forecasting inflation. In particular, high income, highly educated, and male agents produce lower mean squared errors. Moreover, socioeconomically "disadvantaged" respondents assume as a reference point their specific consumption basket, while more advantaged respondents actually observe the general price level. A common observation applying to all socioeconomic groups is that agents positioned around the center of the distribution behave roughly in line with the rational expectations hypothesis. Agents on the left hand side of the median (LHS) of the distribution update information very infrequently. As to agents on the right hand side of the median (RHS), we can affirm that their expectations are consistent with adaptive learning and staggered information updating. However, the speed of learning can vary significantly across percentiles and di¤erent demographic groups.

Keywords: Heterogeneous Expectations; Adaptive Learning; Survey Expectations. (search for similar items in EconPapers)
JEL-codes: C53 D80 E31 J10 (search for similar items in EconPapers)
Pages: 24
Date: 2008-05
New Economics Papers: this item is included in nep-cba and nep-mac
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Citations: View citations in EconPapers (39)

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