The Korean Economic Review
Driving Forces of Inflation Expectations
Byeongdeuk Jang (Sungkyunkwan University) and Young Se Kim (Sungkyunkwan University)Year 2017Vol. 33No. 2
Abstract
This paper addresses some important issues regarding the nature of inflation expectations.By utilizing measures of inflation expectations formed by consumers and professionals, aseries of empirical applications are performed to identify main driving forces of variations ininflation expectations. Tests of forecast efficiency consistently indicate that surveyexpectations are not rational, and thus the expectations of real-world economic actors, notrational agents in a model, are found to be what matter for price setting. As a logicalconsequence of these findings, we explore potential factors agents rely on when forecastinginflation by looking more closely on price changes in consumption expenditure categories aswell as some key macroeconomic aggregates. Empirical results suggest that agents thinkdifferently how aggregate inflation evolves mainly due to the fact that each type of agentsemploys a distinct set of information, which can be interpreted as a dominant source ofdisagreement among agents.