Sticky information and model uncertainty in survey data on inflation expectations

Abstract

This paper compares three reduced-form models of heterogeneity in survey inflation expectations. On the one hand, we specify two models of forecasting inflation based on limited information flows of the type developed in Mankiw and Reis [2002. Sticky information versus sticky prices: a proposal to replace the new Keynesian Phillips curve. Quarterly Journal of Economics 117(4), 1295-1328]. We present maximum likelihood results that suggests a sticky information model with a time-varying distribution structure is consistent with the Michigan survey of inflation expectations. We also compare these 'sticky information' models to the endogenous model uncertainty approach in Branch [2004. The theory of rationally heterogeneous expectations: evidence from survey data on inflation expectations. Economic Journal 114, 497]. Non-parametric evidence suggests that models which allow the degree of heterogeneity to change over time provide a better fit of the data. r

A naïve sticky information model of households’ inflation expectations

“…For example, in Branch' s (2007) Rationally Heterogeneous Expectations (RHE) sticky information model, 2 was 36. Although our result is not fully comparable to that of Branch (2007), we note that in the RHE model most variation in agents' expectations is attributed to unexplained heterogeneity 3 .…”

“…We have not a clear idea about the value of q, hence the uniform prior (Beta(1,1)) is entitled in this case. Furthermore, the prior mean of is set at 5, slightly below the estimate of Branch (2007). Finally, with given prior variances, these marginal prior distributions turned out to be practically noninformative.…”

“…This is the standard modeling approach in the RHE literature where the stochastic terms t are interpreted as individual idiosyncratic shocks representing unobserved heterogeneity, i.e. heterogeneity in individuals' expectations which underlying model can not explain (see Branch, 2007, for discussion and references therein).…”

Inattentive professional forecasters

“…4 Figure (7) plots the evolution of attention, θ t and λ t , over time for the forecasts of the three variables, and shows that there is a significant degree of fluctuations in these parameter. 5 The proportion of forecasters changing their forecasts ranging from 75% to 90% with an average of around 80%.…”

Oczekiwania bliskie racjonalnym? Współczesne koncepcje kształtowania oczekiwań uczestników rynku / Bounded rationality of expectations? Modern hyphotheses of expectations formation of market participants

“…W zależ-ności od przyjętej metodyki i zakresu terytorialnego niespełnione pozostają różne elementy hipotezy racjonalnych oczekiwań. Przykłady badań empirycznych na modelach z lepką informacją dają niejednoznaczne wyniki -w zależności od modelu i przyjętych założeń [Branch 2007]. Teoria epidemiologicznych oczekiwań znalazła potwierdzenie, niekiedy częściowe, w badaniach empirycznych dotyczących sposobu formułowania oczekiwań przeprowadzonych dla różnych obszarów monetarnych, w tym Stanów Zjednoczonych [Pfajfar, Santoro 2006], Niemiec [Lamla, Maag 2012] czy Chin [Lei, Lu, Zhang 2015].…”