The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
The Outreach & Education function engages, empowers and educates the public in the Second District. Our outreach mission furthers the Bank’s commitment to the region by listening to the communities we serve and developing programs, analysis and sponsored conferences and clinics to help meet their needs. Our education mission aims to advance public knowledge about the Federal Reserve System and its role in the economy.
Understanding the formation of consumer inflation expectations is considered crucial for managing monetary policy. Using a unique “information” experiment embedded in a survey, this paper investigates how consumers’ inflation expectations respond to new information. We elicit respondents’ expectations for future inflation before and after providing a random subset of respondents with factual information that may affect their expectations. This design creates unique panel data that allow us to identify causal effects of new information. We find, first, that baseline inflation expectations are right-skewed, and that consumers in the high-expectation right tail are relatively underinformed about objective, inflation-relevant facts. We next find that providing consumers with new information causes them to update their expectations, such that the expectations distribution converges toward its center. Furthermore, respondents who update do so in sensible ways: revisions are proportional to the strength of the information signal, and inversely proportional to the precision of baseline inflation expectations. Our findings indicate that heterogeneous consumer expectations are a result of both different information sets, as well as different information-processing rules. Overall, our results are consistent with a Bayesian learning model. We discuss implications of these results for monetary policy and for macroeconomic modeling.