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The Expectations of Others

Author

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  • García-Lembergman, Ezequiel
  • Hajdini, Ina
  • Leer, John
  • Pedemonte, Mathieu
  • Schoenle, Raphael

Abstract

Using a novel dataset that integrates inflation expectations with information on social network connections, we show that inflation expectations within one's social network have a positive, causal relationship with individual inflation expectations. This relationship is stronger for groups that share common demographic characteristics such as gender, income, or political affiliation and when salient information disseminates through the network. In a monetary union New-Keynesian model, socially determined inflation expectations induce imperfect risk-sharing and can affect the inflation and real output propagation of local and aggregate shocks. To reduce welfare losses due to socially determined expectations, monetary policy should optimally put more weight on the inflation rate of socially more connected regions.

Suggested Citation

  • García-Lembergman, Ezequiel & Hajdini, Ina & Leer, John & Pedemonte, Mathieu & Schoenle, Raphael, 2024. "The Expectations of Others," IDB Publications (Working Papers) 13787, Inter-American Development Bank.
  • Handle: RePEc:idb:brikps:13787
    DOI: http://dx.doi.org/10.18235/0013191
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    References listed on IDEAS

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    1. Lee, Lung-fei & Yu, Jihai, 2010. "Estimation of spatial autoregressive panel data models with fixed effects," Journal of Econometrics, Elsevier, vol. 154(2), pages 165-185, February.
    2. Olivier Coibion & Yuriy Gorodnichenko, 2015. "Information Rigidity and the Expectations Formation Process: A Simple Framework and New Facts," American Economic Review, American Economic Association, vol. 105(8), pages 2644-2678, August.
    3. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(3), pages 797-817.
    4. Nicola Gennaioli & Marta Leva & Raphael Schoenle & Andrei Shleifer, 2024. "How Inflation Expectations De-Anchor: The Role of Selective Memory Cues," NBER Working Papers 32633, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Taniya Ghosh & Abhishek Gorsi, 2024. "Inflation expectations and keeping up with the Joneses," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2024-018, Indira Gandhi Institute of Development Research, Mumbai, India.

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    More about this item

    Keywords

    Inflation expectations; Social network; Monetary union;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy
    • C83 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Survey Methods; Sampling Methods

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