Ulrich Fritsche // DIW
The Dynamics of European Inflation Expectations
Research SeminareWe investigate the relevance of the sticky information model of inflation expectations for four major European economies(France, Germany, Italy and the United Kingdom). In contrast tomost 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 households? and experts? 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 whichdiffer in the stationarity assumptions about the underlying series. Our baseline stationary estimation suggests that the average frequency of information updating for the European households is roughly once in 18 months. The vector error-correction model implies households update information about once a year, comparably as was previously found in the US.<HTML>Download Paper</HTML>
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