The Role of Dispersed Information in Inflation and Inflation Expectations

56 Pages Posted: 2 Nov 2020 Last revised: 9 Dec 2021

See all articles by Zhao Han

Zhao Han

College of William and Mary - Department of Economics

Xiaohan Ma

Texas Tech University

Ruoyun Mao

Indiana University

Date Written: December 8, 2021

Abstract

We solve a rational expectations model of price formation with nominal rigidity and information frictions analytically to study how dispersed information impacts inflation and inflation expectations, without imposing strong structural assumptions on the aggregate marginal cost. We derive a Phillips curve that links inflation, average inflation forecast (i.e., a first-order expectation), and the net effect of higher-order expectations (HOEs). We quantify the essential role of dispersed information in generating inflation inertia and predictable average nowcast and forecast errors. The estimated effect from dispersed information explains a significant inflation variation, and the net effect of HOEs provides a novel micro-foundation for markup shocks.

Keywords: Inflation dynamics; Dispersed information; Expectation formation; Higher-order expectations; Frequency domain method

JEL Classification: C11, D82, D83, E12, E31

Suggested Citation

Han, Zhao and Ma, Xiaohan and Mao, Ruoyun, The Role of Dispersed Information in Inflation and Inflation Expectations (December 8, 2021). Available at SSRN: https://ssrn.com/abstract=3704047 or http://dx.doi.org/10.2139/ssrn.3704047

Zhao Han (Contact Author)

College of William and Mary - Department of Economics ( email )

Williamsburg, VA 23187-8795
United States

Xiaohan Ma

Texas Tech University ( email )

2500 Broadway
Lubbock, TX 79409
United States

Ruoyun Mao

Indiana University ( email )

107 S Indiana Ave
100 South Woodlawn
Bloomington, IN 47405
United States

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