Heterogeneous beliefs and the Phillips curve

Staff working papers set out research in progress by our staff, with the aims of encouraging comments and debate
Published on 28 June 2019

Staff Working Paper No. 807
By Roland Meeks and Francesca Monti

We establish a set of novel empirical facts concerning cross-section distributions of inflation expectations reported in surveys. Almost all the variation in expectations about their mean may be summarized via three factors we call disagreement, skew, and shape. We adopt a functional principal component regression approach to estimating forward-looking models of inflation that exploits the heterogeneity present in individual-level data. By using survey information more effectively, our approach reveals an enhanced role for expectations in inflation dynamics that is robust to lagged inflation, trend inflation, and supply factors. Our findings hold in similar form across two major economies.

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