Expectation Formation in a New Environment: Evidence from the German Reunification

76 Pages Posted: 20 Sep 2017 Last revised: 9 Aug 2019

See all articles by Olga Goldfayn-Frank

Olga Goldfayn-Frank

Deutsche Bundesbank; Goethe University Frankfurt

Johannes Wohlfart

University of Copenhagen

Date Written: August 8, 2019

Abstract

Exploiting the German reunification, we study how households adapt to a new environment in their macroeconomic forecasting. East Germans expect higher inflation than West Germans decades after reunification. These differences are likely driven by the persistent effect of the inflation shock after reunification, which contrasted strongly with experiences of zero inflation in the GDR. East Germans' higher inflation expectations are reflected in higher consumer debt and lower bond holdings. Our findings suggest that large changes in the environment can permanently impede people's ability to form expectations, with an important role for the interaction of experiences before and after the event.

Keywords: Expectation Formation, Inflation, Natural Experiment, German Reunification, Macroeconomic Experiences

JEL Classification: D12, D14, D83, D84, E66, E71, G11

Suggested Citation

Goldfayn-Frank, Olga and Wohlfart, Johannes, Expectation Formation in a New Environment: Evidence from the German Reunification (August 8, 2019). Available at SSRN: https://ssrn.com/abstract=3037525 or http://dx.doi.org/10.2139/ssrn.3037525

Olga Goldfayn-Frank

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Johannes Wohlfart (Contact Author)

University of Copenhagen ( email )

Øster Farimagsgade 5
Building 35
Copenhagen, DK-1353
Denmark

HOME PAGE: http://https://sites.google.com/site/johanneswohlfartecon/home

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