Does Economic Literacy Affect Inflation Expectations? An Experimental Survey Approach

Abstract

This study investigates the effectiveness of the information treatment in the inflation expectations on individuals with varying levels of economic literacy. In this regard, we conducted an experimental survey that provided participants with information related to inflation and other macroeconomic variables. The study reveals that the information treatment was effective in assisting the participants revise their expectations closer to actual inflation. Notably, this was especially effective for those without an economics background as they revised it to align with the actual inflation. Additionally, we found that formal economics learning is insignificant in the formation of inflation expectations given that the relevant information is accessible. Results of the study shed light on the importance of addressing information friction, focusing on financial education and effective communication from central banks.


 

References

[1] Pfajfar D., Santoro, E. 2013. News on Inflation and the Epidemiology of Inflation Expectations. Journal of Money, Credit and Banking, 45 (6): 1045–67. DOI: https://doi.org/10.1111/jmcb.12043
[2] Coibion, O., Gorodnichenko, Y. 2015. Information Rigidity and the Expectations Formation Process: A Simple Framework and New Facts. American Economic Review, 105 (8): 2644–78. DOI:https://doi.org/10.1257/aer.20110306
[3] Armantier, O., Nelson, S., Topa, G., van der Klaauw, W. and Zafar, B. 2016. The Price Is Right: Updating Inflation Expectations in a Randomized Price Information Experiment. Review of Economics and Statistics, 98 (3): 503–23. DOI: https://doi.org/10.1162/REST_a_00499
[4] de Bruin, B. et al. 2010. Expectations of Inflation: The Role of Demographic Variables, Expectation Formation, and Financial Literacy. Journal of Consumer Affairs, 44 (2): 381–402. DOI:https://doi.org/10.1111/j.1745-6606.2010.01174.x
[5] Bryan, M. F, and Venkatu, G. 2001. The Demographics of Inflation Opinion Surveys. Economic Commentary (Federal Reserve Bank of Cleveland).
[6] Burke, Mary A., and Michael Manz. 2014. Economic Literacy and Inflation Expectations: Evidence from a Laboratory Experiment. Journal of Money, Credit and Banking, 46(7): 1421–56. DOI:https://doi.org/10.1111/jmcb.12144
[7] Carroll, C. D. 2003. Macroeconomic Expectations of Households and Professional Forecasters. The Quarterly Journal of Economics, 118 (1): 269–98. DOI: https://doi.org/10.1162/00335530360535207
[8] Cavallo, A., Cruces, G. and Perez-Truglia, R. 2017. Inflation Expectations, Learning, and Supermarket Prices: Evidence from Survey Experiments. American Economic Journal: Macroeconomics, 9 (3): 1–35. DOI:https://doi.org/10.1257/mac.20150147
[9] Coibion, O., and Gorodnichenko, Y. 2012. What Can Survey Forecasts Tell Us about Information Rigidities? Journal of Political Economy, 120 (1): 116–59. DOI: https://doi.org/10.1086/665662
[10] Coibion, O., Gorodnichenko, Y., Kumar, S. and Pedemonte, M. 2020. Inflation Expectations as a Policy Tool? Journal of International Economics, 124 (May): 103297. DOI:https://doi.org/10.1016/j.jinteco.2020.103297
[11] Cornand, C., and Hubert, P. 2022. Information Frictions across Various Types of Inflation Expectations. European Economic Review 146 (July): 104175. https://doi.org/10.1016/j.euroecorev.2022.104175
[12] D’Acunto, F., Hoang, D., Paloviita, M. and Weber, M. 2019. IQ, Expectations, and Choice. Working Paper. Working Paper Series. National Bureau of Economic Research. DOI: https://doi.org/10.3386/w25496
[13] Das, Abhishek, Ghose, A. and Gupta, G. 2018. Expectation Formation in a New Keynesian Economy: Evidence from a Laboratory Experiment. Journal of the Knowledge Economy, 9 (1): 17–39. DOI:https://doi.org/10.1007/s13132-015-0314-z
[14] Duffy, J. 2016. “Macroeconomics: A Survey of Laboratory Research.” In The Handbook of Experimental Economics, Volume 2, edited by John H. Kagel and Alvin E. Roth. Princeton University Press.
[15] Falk, A., et al. 2018. Global Evidence on Economic Preferences. The Quarterly Journal of Economics, 133 (4): 1645–92. DOI: https://doi.org/10.1093/qje/qjy013
[16] Gnan, E., Langthaler, J. and Valderrama, M. T. 2011. Heterogeneity in Euro Area Consumers’ Inflation Expectations: Some Stylized Facts and Implications. Monetary Policy and the Economy, 2: 43–66.
[17] Hubert, P. 2015. ECB Projections as a Tool for Understanding Policy Decisions. Journal of Forecasting, 34 (7): 574–87. DOI: https://doi.org/10.1002/for.2356
[18] Lein, S. M., and Maag, T. 2011. The Formation of Inflation Perceptions: Some Empirical Facts for European Countries: The Formation of Inflation Perceptions. Scottish Journal of Political Economy, 58 (2): 155–88. DOI: https://doi.org/10.1111/j.1467-9485.2011.00541.x
[19] Madeira, C., and Zafar, B. 2015. Heterogeneous Inflation Expectations and Learning. Journal of Money, Credit and Banking, 47 (5): 867–96.
[20] Malmendier, U., and Nagel, S. 2016. Learning from Inflation Experiences. The Quarterly Journal of Economics, 131 (1): 53–87.
[21] Mankiw, N. G., and Reis, R. 2002. Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve. The Quarterly Journal of Economics, 117 (4): 1295–1328. DOI:https://doi.org/10.1162/003355302320935034
[22] Maule, B., and Hubert, P. 2016. “Policy and Macro Signals as Inputs to Inflation Expectation Formation.” SSRN Scholarly Paper. Rochester, NY. DOI: https://doi.org/10.2139/ssrn.2721612
[23] Pfajfar, D., and Santoro, E. 2010. Heterogeneity, Learning and Information Stickiness in Inflation Expectations. Journal of Economic Behavior and Organization, 75 (3): 426–44. DOI:https://doi.org/10.1016/j.jebo.2010.05.012
[24] Reid, M. 2015. Inflation Expectations of the Inattentive General Public. Economic Modelling, 46 (April): 157–66. DOI: https://doi.org/10.1016/j.econmod.2014.12.003
[25] Saakshi, S., and Sahu, S. 2019. An Analysis of Heterogeneity in Inflation Expectations across Cities in India. Journal of Economic Studies, 46 (5): 1116–36. DOI: https://doi.org/10.1108/JES-08-2018-0297
[26] Sims, C. A. 2003. Implications of Rational Inattention. Journal of Monetary Economics, Swiss National Bank/Study Center Gerzensee Conference on Monetary Policy under Incomplete Information, 50(3): 665–90. DOI: https://doi.org/10.1016/S0304-3932(03)00029-1
[27] Ueno, Y., and Namba, R. 2014. “Heterogeneity and Biases in Inflation Expectations of Japanese Households. Technical Report 614. CIS Discussion Paper Series. Institute of Economic Research, Hitotsubashi University. Available at: https://hdl.handle.net/10086/26101
[28] Xu, Y., Chang, H.-L., Lobonţ, O.-R. and Su, C.-W. 2016. Modeling Heterogeneous Inflation Expectations: Empirical Evidence from Demographic Data? Economic Modelling, 57 (September): 153–63. DOI:https://doi.org/10.1016/j.econmod.2016.04.017
[29] Zafar, B., Armantier, O. Nelson, S., Topa, G. and Vanderklaauw, W. 2012. Nudging Inflation Expectations: An Experiment. Liberty Street Economics (blog). November 5, 2012. Available at: https://libertystreeteconomics.newyorkfed.org/2012/11/nudging-inflation-expectations-an-experiment/
Published
2023-12-20
How to Cite
KC, Irfan Ali. Does Economic Literacy Affect Inflation Expectations? An Experimental Survey Approach. Theoretical and Practical Research in Economic Fields, [S.l.], v. 14, n. 2, p. 223 - 232, dec. 2023. ISSN 2068-7710. Available at: <https://journals.aserspublishing.eu/tpref/article/view/8209>. Date accessed: 25 feb. 2024. doi: https://doi.org/10.14505/tpref.v14.2(28).03.