Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/187769
Authors: 
Goldfayn-Frank, Olga
Wohlfart, Johannes
Year of Publication: 
2018
Series/Report no.: 
IMFS Working Paper Series 129
Abstract: 
Exploiting the natural experiment of the German reunification, we examine how consumers adapt to a new environment in their macroeconomic forecasting. We document that East Germans expect higher inflation and make larger forecast errors than West Germans even decades after reunification. Differences in consumption baskets, financial literacy, risk aversion or trust in the central bank cannot fully account for these patterns. We find most support for the explanation that East Germans, who were used to a strong norm of zero inflation, persistently overadjusted the level of their expectations in the face of the initial inflation shock in reunified Germany. Our findings suggest that large changes in the economic environment can permanently impede people's ability to form accurate macroeconomic expectations, with an important role for the interaction of old norms and new experiences around the event.
Subjects: 
Expectation Formation
Inflation
Natural Experiment
German Reunification
Macroeconomic Experiences
JEL: 
D12
D14
D83
D84
G11
Document Type: 
Working Paper
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