Inflationary Disagreement

February 16, 2007

Inflationary Disagreement

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 Third, the sticky-information model, according to which some people form expectations based on outdated information, seems capable of explaining many features of the observed evolution of both the central tendency and the dispersion of inflation expectations over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.