Bryan Caplan  

Inflationary Disagreement

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Mankiw, Reis, and Wolfers have a neat empirical paper on beliefs -and disagreement - about inflation:

In most standard macroeconomic models, people share a common information set and form expectations rationally. There is typically little room for people to disagree.

Our goal in this paper is to suggest that disagreement may be a key to macroeconomic dynamics. We believe we have established three facts about inflation expectations. First, not everyone has the same expectations. The amount of disagreement is substantial. Second, the amount of disagreement varies over time together with other economic aggregates. Third, the sticky-information model, according to which some people form expectations based on outdated information, seems capable of explaining many features of the observed evolution of both the central tendency and the dispersion of inflation expectations over the past fifty years.


My first thought: WWRS? GMU-geek-to-English translation: "What would Robin say?"


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COMMENTS (3 to date)
dWj writes:

Does the existence of a fairly liquid TIPS market change this? Is there a liquid market on anything one could use as a proxy for volatility in the spread between TIPS and nominal treasuries? How well could these concepts replace "expected inflation" and "dispersion in inflation expectations" in the trio's findings?

Robin Hanson writes:

Perhaps inflation is the sort of thing that people don't talk to each other much about, and can't easily infer from the behavior of others. In this case there is no rationality puzzle, as people are not knowingly disagreeing.

John Goes writes:

This might cut into the argument against Mises theory of the boom and bust cycle by means of rational expectations, no?

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