The Dynamics of European Inflation Expectations

• Abstract

  We investigate the relevance of the Carroll’s sticky information model of inflation expectations for four major European economies (France, Germany, Italy and the United Kingdom). In contrast to most rational expectation models, households in the sticky information environment update their expectations occasionally rather than instantaneously due to the costs of acquiring and processing information. Using survey data on household and expert inflation expectations we argue that the model adequately captures the dynamics of household inflation expectations. We estimate two alternative parametrizations of the sticky information model which differ in the stationarity assumptions about the underlying series. Our baseline stationary estimation suggests that the average frequency of information updating for the European households is roughly once in 18 months. The vector error-correction model implies households update information about once a year.

• Keywords

  Inflation expectations, sticky information, inflation persistence