Working Paper: CEPR ID: DP17537
Authors: Francesca Monti; Roland Meeks
Abstract: Heterogeneous beliefs modify the New Keynesian Phillips curve by introducing a term in the cross-section distribution of expectations. We develop a novel functional data approach to estimation and inference in survey-based Phillips curves that accounts for variation in distributions of expectations, generalizing standard approaches. Our findings demonstrate the statistical and economic importance of heterogeneous beliefs for inflation dynamics, especially during periods of macroeconomic disruption. Our findings hold in similar form across two major economies.
Keywords: inflation dynamics; New Keynesian Phillips curve; survey expectations; functional principal components; functional regression
JEL Codes: C4; C55; D84; E31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| heterogeneous beliefs (D80) | inflation dynamics (E31) |
| cross-sectional dispersion of beliefs (D80) | New Keynesian Phillips curve (E12) |
| shift in distribution of beliefs (D39) | inflation (E31) |
| deviation from consensus beliefs (D70) | inflation (E31) |
| heterogeneous beliefs (D80) | inflation during macroeconomic disruptions (E31) |
| heterogeneous beliefs (D80) | inflation (US and UK) (E31) |