Exposure to frequent price changes shapes inflation expectations

a column by Francesco D'Acunto, Ulrike Malmendier and Michael Weber for VOX: CEPR’s Policy Portal

Policymakers seek to manage inflation expectations, but we understand little about how households form and update their expectations of inflation.

The column tests Lucas's conjecture that the price changes households observe, rather than all price changes, drive expectations. A measure of individual household consumption weighted by the frequency of purchase is a statistically and economically significant driver of households' expectations.

This challenges the modelling assumptions that central bank policymakers currently make.

Continue reading

---

Implications of the permanent-transitory confusion for New-Keynesian modelling, inflation forecasts, and the post-Global Crisis era

a column by Alex Cukierman for VOX: CEPR’s Policy Portal

Individuals are never fully certain whether economic developments are persistent or temporary.

This column shows that this permanent-transitory confusion has pervasive implications. It argues that the confusion injects the past into even purely forward-looking New-Keynesian frameworks, and shows empirically that inflationary forecasts indeed rely on past inflation.

Continue reading

---