Fed/GFLEC Financial Literacy Seminar Series

October 16, 2014

3:30 pm - 5:00 pm

Seminar III: Inflation Expectations

and Behavior:

Do Survey Respondents Act on Their Beliefs?


« Event's Main Page

Wilbert van der Klaauw

Senior Vice President, Microeconomic Studies Function
Federal Reserve Bank of New York


FinLit Talks: Interviews with Financial Literacy Thought Leaders

LOCATION

George Washington University School of Business
Duquès Hall, Room 652
2201 G Street NW (main entrance on 22nd Street between G and H Streets)
Metro: Foggy Bottom Station

Bio: Wilbert van der Klaauw

Wilbert van der Klaauw is a Senior Vice President in Research and Director of the Center for Microeconomic Data. He is a labor economist and applied econometrician whose research interests include the study of life cycle labor supply and occupational choice decisions, household financial behavior and expectations, educational investment and productivity, and econometric approaches to program evaluation. Prior to joining the New York Fed, Dr. van der Klaauw was a Professor at UNC-Chapel Hill and Assistant Professor at New York University. He holds a Ph.D. from Brown University.


Abstract

Inflation Expectations and Behavior: Do Survey Respondents Act on Their Beliefs? by Wilbert van der Klaauw.

We compare the inflation expectations reported by consumers in a survey with their behavior in a financially incentivized investment experiment. The survey is found to be informative in the sense that the beliefs reported by the respondents are correlated with their choices in the experiment. More importantly, we find evidence that most respondents act on their inflation expectations, showing patterns consistent with economic theory. Respondents whose behavior cannot be rationalized tend to have lower education, numeracy, and financial literacy. These findings help confirm the relevance of inflation expectations surveys and provide support to the micro-foundations of modern macroeconomic models.

 

The Price is Right: Updating Inflation Expectations in a Randomized Price Information Experiment by Wilbert van der Klaauw

Understanding the formation of consumer inflation expectations is considered crucial for monetary policy. Using a unique “information” experiment embedded in a survey, this paper investigates how consumers’ inflation expectations respond to new information. We elicit respondents’ expectations for future inflation before and after providing a random subset of respondents with factual information that may affect their expectations. This design creates unique panel data that allow us to identify causal effects of new information. We find that respondents, on average, update their expectations in response to (certain types of) provided information, and do so sensibly, in a manner consistent with Bayesian updating—with revisions systematically related to the strength of the information signal and uncertainty of baseline inflation expectations. Furthermore, we present evidence that baseline inflation expectations are right-skewed, and that consumers in the high-expectation right tail are relatively under-informed about objective inflation-relevant facts. As a result of information provision, however, the distribution of inflation expectations converges toward its center and cross-sectional disagreement declines. We also document heterogeneous information- processing by gender, and present suggestive evidence of respondents forecasting under asymmetric loss. Overall, our results provide support for expectation-formation models in which agents form expectations rationally but face information constraints. We discuss implications of our results for monetary policy and for macro-economic modeling.


 

FinLit Talks

2014 FALL SEMESTER SESSIONS

Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

3:10, John Shoven, Stanford University

Inflation Expectations and Behavior

9:20, Wilbert van der Klauuw, Federal Reserve Bank of New York

Individual Investors' Numerical Skills

6:32, Susan Krische, American University