A BEJM Topics article.

Abstract

We investigate the relevance of Carroll's sticky information model of inflation expectations for four major European economies (France, Germany, Italy and the United Kingdom). In contrast to the most rational expectation models, households in the sticky information environment update their expectations occasionally rather than instantaneously due to the costs of acquiring and processing information. Using survey data on household and expert inflation expectations we argue that the model adequately captures the dynamics of household inflation expectations. We estimate two alternative parametrizations of the sticky information model which differ in the stationarity assumptions about the underlying series. Our baseline stationary estimation suggests that the average frequency of information updating for European households is roughly once in 18 months. The vector error-correction model implies households update information about once a year.

Submitted: December 19, 2006 · Accepted: February 8, 2008 · Published: March 13, 2008

Recommended Citation

Doepke, Joerg; Dovern, Jonas; Fritsche, Ulrich; and Slacalek, Jiri (2008) "The Dynamics of European Inflation Expectations," The B.E. Journal of Macroeconomics: Vol. 8 : Iss. 1 (Topics), Article 12.
DOI: 10.2202/1935-1690.1540
Available at: http://www.bepress.com/bejm/vol8/iss1/art12