Aggregate Implications of Heterogeneous Inflation Expectations: The Role of Individual Experience

Consumers’ inflation expectations are heterogeneous across birth cohorts and history-dependent: using panel data from the Survey of Consumer Expectations (SCE), the paper documents that each cohort’s inflation forecast is anchored to its cumulative inflation history, with the degree of anchoring estimated structurally. The authors model this via an experience-based Kalman filter in which each agent’s forecast combines a common Kalman-filtered signal (derived from food prices) with a cohort-specific reference term built from the cohort’s entire prior sequence of expected inflation. The estimated history-weight parameter θ is negative, confirming that agents positively weight their inflation history rather than overreacting to current news — a pattern that holds not only in US SCE and Michigan Survey of Consumers data but also across six European countries in the ECB Consumer Expectations Survey. Embedded in a Blanchard–Yaari perpetual-youth OLG New Keynesian model — where households hold experience-based expectations but firms set prices under rational Calvo frictions — the mechanism produces qualitatively different aggregate dynamics from full-information rational expectations (FIRE): after inflationary shocks, expectations initially underreact (agents anchor to the low-inflation steady state) and then persist well beyond the shock horizon as high inflation is gradually incorporated into cohort memory, generating hump-shaped expectation dynamics. For monetary policy, the optimal Taylor rule must be more aggressive after cost shocks than under FIRE: an energetic early response prevents the high-inflation episode from entering cohort memories, avoiding a self-reinforcing upward drift in inflation expectations. Applied to the 2021 high-inflation episode, the model predicts that the youngest cohorts — experiencing high inflation for the first time — will exhibit persistently elevated inflation expectations long after the supply shocks that caused the episode have dissipated.

Hiroshi Toma | Macro Paper Warehouse

Aggregate Implications of Heterogeneous Inflation Expectations: The Role of Individual Experience