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Inflation as a 'bad', heuristics and aggregate shocks: New evidence on expectation formation

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  • Sarantis Tsiaplias

    (Melbourne Institute: Applied Economic & Social Research, The University of Melbourne)

Abstract

This paper studies how inflation expectations are formed, how they are influenced by Inflation-as-a-Bad (IAAB) perceptions, and how these perceptions relate to economic shocks. IAAB perceptions significantly alter inflation expectations, causing spikes, positive bias, and deviations from the Phillips Curve. These perceptions have a distinct impact from canonical properties such as information rigidities, over-reaction, and rationality, which fail to adequately characterize consumer inflation expectations. A model combining rational expectations, information frictions, and consumer heuristics effectively explains the time-variation in the inflation expectations of 365,000 consumers.

Suggested Citation

  • Sarantis Tsiaplias, 2024. "Inflation as a 'bad', heuristics and aggregate shocks: New evidence on expectation formation," Melbourne Institute Working Paper Series wp2024n03, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    • Handle: RePEc:iae:iaewps:wp2024n03
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    More about this item

    Keywords

    inflation expectations; inflationary dynamics; aggregate shocks; information rigidities; rationality;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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