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Economic Literacy and Inflation Expectations: Evidence from a Laboratory Experiment

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  • MARY A. BURKE
  • MICHAEL MANZ

Abstract

We present experimental evidence of a link between economic literacy and inflation forecast accuracy. The experiment investigates two channels through which economic literacy may enable better forecasts: (i) choice of information and (ii) use of information. More literate subjects choose more relevant information and use the given information more effectively. Starting from a 10th percentile score, the boost in literacy from taking an economics course predicts a 0.64 standard deviation decline in mean absolute forecasting error. Our findings suggest that a significant portion of demographic heterogeneity in inflation expectations—observed in survey data—may be driven by heterogeneity in economic literacy.

Suggested Citation

  • Mary A. Burke & Michael Manz, 2014. "Economic Literacy and Inflation Expectations: Evidence from a Laboratory Experiment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(7), pages 1421-1456, October.
    • Handle: RePEc:wly:jmoncb:v:46:y:2014:i:7:p:1421-1456
    DOI: 10.1111/jmcb.12144
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