Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/324780 
Year of Publication: 
2025
Series/Report no.: 
IDB Working Paper Series No. IDB-WP-1699
Publisher: 
Inter-American Development Bank (IDB), Washington, DC
Abstract: 
We explore the implications of heterogeneous, history-dependent inflation expectations in a general equilibrium setting. We propose an experience-based expectations-augmented Kalman filter to represent consumers' heterogeneous inflation expectations, where heterogeneity arises from an anchoring-to-the-past mechanism. Using survey data, we show that the model replicates US consumers' inflation expectations and their heterogeneity across cohorts. We introduce this mechanism into a New Keynesian model and find that heterogeneous expectations anchor aggregate responses to the agents' inflation history, producing sluggish expectations dynamics. Central banks should be active to prevent inflationary episodes that agents will remember far into the future.
Subjects: 
Belief formation
Heterogeneous expectations
Survey data
Overextrapolation
JEL: 
D84
E31
E58
E71
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Working Paper

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