Testing Near-Rationality Using Detailed Survey Data

40 Pages Posted: 9 Nov 2006 Last revised: 30 Oct 2007

See all articles by Stefan Palmqvist

Stefan Palmqvist

affiliation not provided to SSRN

Michael F. Bryan

Federal Reserve Bank of Cleveland; Federal Reserve Banks - Federal Reserve Bank of Atlanta

Date Written: October 19, 2006

Abstract

This paper considers the evidence of near-rationality, as described by Akerlof, Dickens, and Perry (2000). Using detailed surveys of household inflation expectations for the United States and Sweden, we find that the data are generally unsupportive of the near-rationality hypothesis. However, we document that household inflation expectations tend to settle around discrete and largely fixed focal points, suggesting that both U.S. and Swedish households gauge inflation prospects in rather broad, qualitative terms. Moreover, the combination of a low-inflation environment and an inflation target in Sweden has been accompanied by a disproportionately high proportion of Swedish households expecting no inflation. However, a similar low-inflation trend in the United States, which does not have an explicit inflation target, reveals no such rise in the proportion of households expecting no inflation. This observation suggests that the way the central bank communicates its inflation objective may influence inflation expectations independently of the inflation trend it actually pursues.

Keywords: Inflation expectations, Rationality, Inflation targeting, Phillips curve

JEL Classification: D1, D7, E6

Suggested Citation

Palmqvist, Stefan and Bryan, Michael F., Testing Near-Rationality Using Detailed Survey Data (October 19, 2006). Riksbank Research Paper Series No. 20, Sveriges Riksbank Working Paper Series No. 183, FRB of Cleveland Working Paper No. 05-02, Available at SSRN: https://ssrn.com/abstract=938731 or http://dx.doi.org/10.2139/ssrn.938731

Stefan Palmqvist (Contact Author)

affiliation not provided to SSRN

Michael F. Bryan

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101
United States

Federal Reserve Banks - Federal Reserve Bank of Atlanta

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

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