6533b854fe1ef96bd12aeaab

RESEARCH PRODUCT

A Naïve Sticky Information Model of Households’ Inflation Expectations

Jani LuotoMarkku LanneArto Luoma

subject

InflationEstimationEconomics and Econometricsjel:C82Control and OptimizationInflation expectations; heterogeneous expectations; survey expectations; sticky information; Bayesian analysisjel:D84Applied Mathematicsmedia_common.quotation_subjectjel:C5305 social sciencesBayesian probabilityjel:E31jel:C11DeflationSticky information0502 economics and businessEconometricsEconomicsSurvey data collection050207 economicsSimulation methods050205 econometrics media_common

description

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.

yearjournalcountryeditionlanguage
2009-06-01
https://mpra.ub.uni-muenchen.de/8663/1/MPRA_paper_8663.pdf