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STATE-DEPENDENT FORMATION OF INFLATION EXPECTATIONS

Published online by Cambridge University Press:  30 April 2021

Bopjun Gwak*
Affiliation:
Bank of Korea
*
Address correspondence to: Bopjun Gwak, Bank of Korea, Research Department, Sejong-daero 67, Jung-gu, Seoul, South Korea. e-mail: bopjun.gwak@gmail.com. Phone: +82 2 759 4265.

Abstract

The learning-from-experience model of Malmendier and Nagel [(2016) Quarterly Journal of Economics 131, 53–87] successfully reproduces the heterogeneity in inflation expectations across age groups. However, inflation expectations presumably depend on not only age and experience but also inflation regime. Therefore, this paper proposes an extended learning-from-experience model, in which expectation formation depends on inflation regime. Estimating the model with US data, I find that when inflation is higher and more volatile, households place more weight on recent data when making private forecasts. Moreover, in this regime, households rely more heavily on private forecasts than on public information.

Type
Articles
Copyright
© Cambridge University Press 2021

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Footnotes

This study is a part of my Ph.D. dissertation at Goethe University Frankfurt. I would like to thank my advisor Mirko Wiederholt for his advice and encouragement. I am also grateful to Michael Binder, Klaus Wälde, Thomas Otter, Michael Haliassos, Elisabeth Falck, Paul Reimers, Giang Nghiem, Zhuoer Qiu, and seminar participants at Goethe University Frankfurt for valuable comments and suggestions. I appreciate George Evans (Co-editor) and two anonymous referees for constructive discussions and insightful suggestions. All errors are mine.

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