Search Results
Working Paper
Inflation Thresholds and Inattention
Inflation expectations are key to economic activity, and in the current economic climate of a heated labor market, they are central to the policy debate. At the same time, a growing literature on inattention suggests that individuals, and therefore individual behavior, may not be sensitive to changes in inflation when it is low. This paper explores evidence of such inattention by constructing three different measures based on the University of Michigan’s Survey of Consumers 1-year ahead inflation expectations. Exploring inflation thresholds of 2, 3, and 4 percent, our findings are ...
Working Paper
Inflation Inattention on the Production Network: Firm-Level Evidence and Macro Implications
Relying on a micro-level dataset of US firms' inflation expectations, we document that firms in industries with larger Domar weights and more flexible prices have more accurate inflation forecasts. To explain these patterns, we develop a rational inattention model of price-setting firms within a production network. In equilibrium, firms' inflation forecast accuracy depends on their attention to marginal costs, the comovement between their marginal cost and aggregate inflation, and the change in the marginal cost. When calibrated to US input-output data, the model replicates the cross-sectoral ...
Working Paper
Low Passthrough from Inflation Expectations to Income Growth Expectations: Why People Dislike Inflation
We implement a novel methodology to disentangle two-way causality in inflation and income expectations in a large, nationally representative survey of US consumers. We find a 20 percent passthrough from expected inflation to expected income growth, but no statistically significant effect in the other direction. Passthrough is higher for higher-income individuals and men. Higher inflation expectations increase consumers’ likelihood to search for higher-paying new jobs. In a calibrated search-and-matching model, dampened responses of wages to demand and supply shocks translate into greater ...
Working Paper
Low Passthrough from Inflation Expectations to Income Growth Expectations: Why People Dislike Inflation
Using a novel experimental setup, we study the direction of causality between consumers’ inflation expectations and their income growth expectations. In a large, nationally representative survey of US consumers, we find that the rate of passthrough from expected inflation to expected income growth is incomplete, on the order of 20 percent. There is no statistically significant effect going in the other direction. Passthrough varies systematically with demographic and socioeconomic factors, with greater passthrough for higher-income individuals than lower-income individuals, although it is ...
Working Paper
Indirect Consumer Inflation Expectations: Theory and Evidence
Based on indirect utility theory, we introduce a novel methodology of measuring inflation expectations indirectly. This methodology starts at the individual level, asking consumers about the change in income required to buy the same amounts of goods and services one year ahead. Analytically, our methodology possesses smaller ex-post aggregate inflation forecast errors relative to forecasts based on conventional survey questions. We ask this question in a large-scale, high-frequency survey of consumers in the US and 14 countries, and we show that indirect consumer inflation expectations ...
Working Paper
The Transmission of International Monetary Policy Shocks on Firms' Expectations
Motivated by the dominant role of the US dollar, we explore how monetary policy (MP) shocks in the US can affect a small open economy through the expectation channel. We combine data from a panel survey of firms' expectations in Uruguay with granular information about firms' debt position and total imports on a monthly basis. We show that a contractionary MP shock in the US reduces firms' inflation and cost expectations in Uruguay. This result contrasts with the inflationary effect of this shock on the Uruguayan economy, suggesting uncertainty about the policy regime. We discuss the issues ...
Working Paper
Aggregate Implications of Heterogeneous Inflation Expectations: The Role of Individual Experience
We show that inflation expectations are heterogeneous and depend on past individual experiences. We propose a diagnostic expectations-augmented Kalman filter to represent consumers’ heterogeneous inflation expectations-formation process, where heterogeneity comes from an anchoring-to-the-past mechanism. We estimate the diagnosticity parameter that governs the inflation expectations-formation process and show that the model can replicate systematic differences in inflation expectations across cohorts in the US. We introduce this mechanism into a New Keynesian model and find that ...
Working Paper
The Expectations of Others
Based on a framework of memory and recall that accounts for social networks, we provide conditions under which social networks can amplify expectations. We provide evidence for several predictions of the model using a novel dataset on inflation expectations and social network connections: Inflation expectations in the social network are statistically significantly, positively associated with individual inflation expectations; the relationship is stronger for groups that share common demographic characteristics, such as gender, income, or political affiliation. An instrumental variable ...
Working Paper
The Causal Effects of Expected Depreciations
We estimate the causal effects of a shift in the expected future exchange rate of a local currency against the US dollar on a representative sample of firms in an open economy. We survey a nationally representative sample of firms and provide the one-year-ahead nominal exchange rate forecast published by the local central bank to a random sub-sample of firm managers. The treatment is effective in shifting exchange rate and inflation expectations and perceptions. These effects are persistent and larger for non-exporting firms. Linking survey responses with administrative census data, we find ...
Working Paper
Recency Effects in Perceived Uncertainty
Firms frequently revise not only their expectations, but also how uncertain they feel about those expectations. Using the U.S. Survey of Business Uncertainty, we study perceived uncertainty about firms’ own sales and employment growth. Reported uncertainty rises after larger revisions to firms’ point forecasts, with the strongest response to the most recent revision. This recency pattern remains visible outside elevated sectoral-volatility episodes. We develop a model in which agents learn about a constant-volatility process but recall older observations noisily. Noisy recall gives recent ...