Heterogeneous Beliefs and the Phillips Curve

Heterogeneous beliefs modify the New Keynesian Phillips curve by introducing a term in the cross-section distribution of expectations. We develop a novel functional data approach to estimation and inference in survey-based Phillips curves that accounts for variation in distributions of expectations, generalizing standard approaches. Our findings demonstrate the statistical and economic importance of heterogeneous beliefs for inflation dynamics, especially during periods of macroeconomic disruption.Our findings hold in similar form across two major economies.