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Inflation Expectations And Consumption With Machine Learning

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  • Diana Gabrielyan
  • Lenno Uusküla

Abstract

We extract measures of inflation expectations from online news to build real interest rates that capture true consumer expectations. The new measure is infused to various Euler consumption models. While benchmark models based on traditional risk-free returns rates fail, models built with novel news-driven inflation expectations indices improve upon benchmark models and result in strong instruments. Our positive findings highlight the role played by the media for consumer expectation formation and allow for the use of such novel data sources for other key macroeconomic relationships.

Suggested Citation

  • Diana Gabrielyan & Lenno Uusküla, 2022. "Inflation Expectations And Consumption With Machine Learning," University of Tartu - Faculty of Economics and Business Administration Working Paper Series 142, Faculty of Economics and Business Administration, University of Tartu (Estonia).
    • Handle: RePEc:mtk:febawb:142
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    References listed on IDEAS

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    Keywords

    Euler equation; expectations; media; machine learning;
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