Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/338414 
Year of Publication: 
2026
Series/Report no.: 
CESifo Working Paper No. 12450
Publisher: 
Munich Society for the Promotion of Economic Research - CESifo GmbH, Munich
Abstract: 
We study how consumers form and revise inflation expectations using a unique, highly balanced monthly panel of Dutch households. We develop a Bayesian framework that nests Full-Information Rational Expectations (FIRE) alongside common forecasting heuristics and test it by recovering person-specific belief-updating rules from individual time-series regressions. Our novel individual-level design reveals substantial heterogeneity in how households process information over time. On average, consumers systematically overreact to current inflation, echoing patterns found for professional forecasters. Only 2.5 percent, predominantly wealthier, more educated men, behave consistently with FIRE. Most consumers rely on simple heuristics, especially adaptive expectations. Our results show that heuristic learning, not FIRE, characterizes expectation formation for the vast majority of households. Crucially, heterogeneity in belief updating is both large and systematic.
Subjects: 
household inflation expectations
FIRE
heuristic learning
JEL: 
E31
E37
E70
Document Type: 
Working Paper
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