In this paper we propose novel techniques for the empirical analysis of adaptive learning and sticky information in inflation expectations. These methodologies are applied to the distribution of households' inflation expectations collected by the University of Michigan Survey Research Center. To account for the evolution of the cross-section of inflation forecasts over time and measure the degree of heterogeneity in private agents' forecasts, we explore time series of percentiles from the empirical distribution. Our results show that heterogeneity is pervasive in the process of inflation expectation formation. We identify three regions of the distribution that correspond to different underlying mechanisms of expectation formation: a static or highly autoregressive region on the left hand side of the median, a nearly rational 6 We would like to thank the Editor, two anonymous referees, Sean Holly, Seppo Honkapohja, Hashem Pesaran, Cars Hommes, Tiago Cavalcanti, Domenico Delli Gatti, Chryssi Giannitsarou, Steffan Ball, Jagjit Chada, Daniele Massacci, Linda Rousova and seminar participants at Keele University, Cambridge Univer- JEL: E31; C53; D80;
This paper examines the nexus between news coverage on inflation and households’ inflation expectations. In doing so, we test the epidemiological foundations of the sticky information model (Carroll ). We use both aggregate and household‐level data from the Survey Research Center at the University of Michigan. We highlight a fundamental disconnection among news on inflation, consumers’ frequency of expectation updating, and the accuracy of their expectations. Our evidence provides at best weak support to the epidemiological framework, as most of the consumers who update their expectations do not revise them toward professional forecasters’ mean forecast.
This paper studies consumers' inflation expectations using micro-level data from the University of Michigan's Surveys of Consumers. It shows that beyond the well-established socioeconomic factors such as income, age, or gender, inflation expectations are also related to respondents' financial situation, their purchasing attitudes, and their expectations about the macroeconomy. Respondents with current or expected financial difficulties and those with pessimistic attitudes about major purchases, income developments, or unemployment have a stronger upward bias than other households. However, their bias shrinks by more than that of the average household in response to increasing media reporting about inflation.
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Summary. The paper explores time variation in the distribution of firm level growth of total sales. Three novel results are reported. First, firms on the left‐hand side of the distribution, i.e. firms that are growing more slowly or declining, are typically more responsive to aggregate shocks than those on the right‐hand side of the distribution. Second, trending behaviour in the volatility of firm growth is predominantly driven by increasing dispersion in the growth of highly performing firms. Third, shifts in the probability mass on either side of the mode may act as important propagators of business fluctuations. Financial frictions emerge as a mechanism that is capable of accounting for these facts.
We document that the United States and other G7 economies have been characterized by an increasingly negative business-cycle asymmetry over the last three decades. This finding can be explained by the concurrent increase in the financial leverage of households and firms. To support this view, we devise and estimate a dynamic general equilibrium model with collateralized borrowing and occasionally binding credit constraints. Improved access to credit increases the likelihood that financial constraints become nonbinding in the face of expansionary shocks, allowing agents to freely substitute inter-temporally. Contractionary shocks, however, are further amplified by drops in collateral values, since constraints remain binding. As a result, booms become progressively smoother and more prolonged than busts. Finally, in line with recent empirical evidence, financially driven expansions lead to deeper contractions, as compared with equally sized nonfinancial expansions. (JEL D14, E23, E32, E44)
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