Belief distortions and Disagreement about Inflation

Giuseppe Pagano Giorgianni and Valeria Patella
Additional contact information
Giuseppe Pagano Giorgianni: Sapienza University Rome, Italy

Working Paper series from Rimini Centre for Economic Analysis

Abstract: Disagreement in beliefs correlates with consensus expectations, inflation, and forecast errors. We evaluate whether disagreement emerges endogenously from irrational beliefs, and whether it is relevant for inflation and unemployment outcomes. Using the microdata of households' one-year-ahead inflation expectations from the Michigan Survey of Consumers, we estimate a functional data measure of inflation beliefs’ distribution. Disagreement explains most of its effect on inflation. Then, local projections simulate a belief distortion shock and show that an increase in consensus pessimism - defined as upward biases in inflation and unemployment forecasts - leads agents to price future uncertainty using information from the cross-sectional distribution of inflation expectations: higher inflation disagreement reflects lower expected profits, hence leading firms to increase inflation; whereas, they become more attentive towards firing decisions, explaining negligible effects on unemployment in the short to medium term.

Keywords: Inflation; Disagreement; Survey Expectations Microdata; Functional Data Analysis; Local Projections; Counterfactuals (search for similar items in EconPapers)
JEL-codes: C22 C32 D84 E31 (search for similar items in EconPapers)
Date: 2024-06
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-mac and nep-mon
References: Add references at CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://rcea.org/RePEc/pdf/wp24-08.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:24-08

Access Statistics for this paper

More papers in Working Paper series from Rimini Centre for Economic Analysis Contact information at EDIRC.
Bibliographic data for series maintained by Marco Savioli ().