Essays on Macroeconomic Expectations

Abstract

This thesis consists of two chapters on macroeconomic expectations. The first chapter, entitled Learning Under Multiple Information Sets, analyses how individuals form inflation expectations under information uncertainty. Using evidence from a period with multiple public inflation statistics and an increase in relative price dispersion (Argentina, 2007-2011), I show that individuals use their own inflation experience--based on the change in prices of the goods they purchase--to form inflation expectations. More specifically, the inflation expectations of lower income households, who experienced higher average household-specific rates of inflation, were higher. I characterize inflation experience by using daily (online) data on prices and expenditure information on roughly 25,000 households to construct household-specific price indexes. To disentangle the effect of information uncertainty from price dispersion, I model expectations through a Bayesian learner who knows signals can be noisy but also biased. Results suggest that, even in situations with a unique inflation statistic, inflation experience may affect economic decisions and outcomes if there are doubts about the quality of public information. The second chapter, entitled Underreaction In Expectations After Large Depreciations, analyses how inflation expectations react to large depreciations. I document an underreaction in consensus inflation expectations following large depreciations. Underreaction increases with the average nominal exchange rate depreciation and, surprisingly, is more important in emerging than in advanced economies, both in the short and medium horizon. Results hold after controlling for other well-known predictors of inflation forecast errors. Moreover, when reactions to new available information are considered through forecast revisions, I find that: (i) recent support for models of information rigidities might not necessarily be extrapolated to emerging economies, where predictable overreactions in expectations exist irrespective of large depreciations, and (ii) baseline models of sticky and noisy information may be insufficient to explain deviations from full-information rational expectations under extreme events.

Date of Award	1 Aug 2021
Original language	English
Awarding Institution	The University of Manchester
Supervisor	George Bratsiotis (Supervisor) & Michele Berardi (Supervisor)