Inflation Expectations, Learning, and Supermarket Prices: Evidence from Survey Experiments

Alberto  Cavallo; Guillermo  Cruces; Ricardo  Perez-Truglia

Article | American Economic Journal: Macroeconomics | July 2017

Inflation Expectations, Learning, and Supermarket Prices: Evidence from Survey Experiments

by Alberto Cavallo, Guillermo Cruces and Ricardo Perez-Truglia

Abstract

Information frictions play a central role in the formation of household inflation expectations, but there is no consensus about their origins. We address this question with novel evidence from survey experiments. We document two main findings. First, individuals in lower-inflation contexts have significantly weaker priors about the inflation rate. This finding suggests that rational inattention may be an important source of information frictions. Second, cognitive limitations also appear to be a source of information frictions: even when information about inflation statistics is made readily available, individuals still place a significant weight on less accurate sources of information, such as their memories of the price changes of the supermarket products they purchase. We discuss the implications of these findings for macroeconomic models and policy-making.

Keywords: inflation expectations; survey experiment; rational inattention; Supermarkets; Macroeconomics; Household; Inflation and Deflation; Policy;

Format: Print

Find at Harvard Read Now

Citation:

Cavallo, Alberto, Guillermo Cruces, and Ricardo Perez-Truglia. "Inflation Expectations, Learning, and Supermarket Prices: Evidence from Survey Experiments." American Economic Journal: Macroeconomics 9, no. 3 (July 2017): 1–35.

Supplemental Information

In early 2020, a coronavirus pandemic swept the globe, ushering in unprecedented disruptions to the global economy. Both supply and demand were decimated by lockdowns and border closings, as well as reduced spending by fearful consumers. In response, governments around the world made equally unprecedented policy moves, spending trillions of dollars on fiscal stimulus measures to bridge the gap during the self-imposed shutdown. As the pandemic progressed, governments had to weigh the costs between loss of life due to opening up their economies and the economic devastation caused by delaying a reopening.

The HBS COVID-19 Global Policy Tracker is an initiative by the Business, Government and the International Economy (BGIE) unit at Harvard Business School (HBS) to collect and standardize economic policies implemented as a response to the coronavirus pandemic around the world. We focus on fiscal policy, monetary policy, and lockdowns and quantify government responses in common variables, units, and currencies to facilitate cross-country comparisons. The database is updated in real time with the efforts of several dozens of students at HBS and other Harvard schools.

Faculty & Research

Inflation Expectations, Learning, and Supermarket Prices: Evidence from Survey Experiments

Abstract

Citation:

Supplemental Information

About the Author

More from the Author