Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication

CentER Discussion Paper Series No. 2013-063

35 Pages Posted: 12 Nov 2013

See all articles by Lena Dräger

Lena Dräger

Leibniz University Hannover

Michael J. Lamla

ETH Zurich - KOF Swiss Economic Institute; University of Essex

Damjan Pfajfar

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: November 7, 2013

Abstract

Using the microdata of the Michigan Survey of Consumers, we evaluate whether U.S. consumers form macroeconomic expectations consistent with different economic concepts. We check whether their expectations are in line with the Phillips Curve, the Taylor Rule and the Income Fisher Equation. We observe that 50% of the surveyed population have expectations consistent with the Income Fisher equation and the Taylor Rule, while 25% are in line with the Phillips Curve. However, only 6% of consumers form theory-consistent expectations with respect to all three concepts. For the Taylor Rule and the Phillips curve we observe a strong cyclical pattern. For all three concepts we find significant differences across demographic groups. Evaluating determinants of consistency, we provide evidence that the likelihood of having theory-consistent expectations with respect to the Phillips curve and the Taylor rule falls during recessions and with inflation higher than 2%. Moreover, consistency with respect to all three concepts is affected by changes in the communication policy of the Fed, where the strongest positive effect on consistency comes from the introduction of the official inflation target. Finally, we show that consumers with theory-consistent expectations have lower absolute inflation forecast errors and are closer to professionals' inflation forecasts.

Keywords: Macroeconomic expectations, microdata, macroeconomic literacy, central bank communication, consumer forecast accuracy

JEL Classification: C25, D84, E31.

Suggested Citation

Dräger, Lena and Lamla, Michael J. and Pfajfar, Damjan, Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication (November 7, 2013). CentER Discussion Paper Series No. 2013-063. Available at SSRN: https://ssrn.com/abstract=2352856 or http://dx.doi.org/10.2139/ssrn.2352856

Lena Dräger

Leibniz University Hannover ( email )

Schneiderberg 50
Hannover, 30167
Germany

Michael J. Lamla

ETH Zurich - KOF Swiss Economic Institute ( email )

Zurich
Switzerland

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Damjan Pfajfar (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
26
Abstract Views
197
PlumX Metrics