Inflation Expectations, Disagreement, and Monetary Policy

Abstract

Survey data on inflation expectations show that: (i) private sector forecasts and central bank forecasts are not fully aligned and (ii) private sector forecasters disagree about inflation expectations. To reconcile these two facts we introduce dispersed information in a New Keynesian model, where as a result, inflation expectations differ between the private sector and the central bank. We show that output and inflation responses change markedly when the central bank responds to private sector inflation expectations rather than to their own.

Keywords: business cycles, survey data, learning, disagreement, monetary policy

JEL Classification: E52, E31, D83