Heterogeneous Inflation Expectations Across Economic Agents: Implications for Monetary Policy
Sergey Ivashchenko, Andrey Sinyakov
As shown in the economic literature, inflation expectations vary significantly across different types of economic agents—namely, households, firms, and financial intermediaries (analysts). In practice, survey data from Russia (and other countries) confirm that households tend to consistently overestimate future inflation and are highly reactive to short-term inflation spikes—indicating that their expectations are weakly anchored. Firms also tend to overestimate inflation, though to a lesser degree, while analysts in the financial sector maintain expectations close to the inflation target.
This heterogeneity in inflation expectations across agent types raises the question: whose expectations matter most for actual inflation? The present study aims to answer this within a general equilibrium framework.
The authors introduce non-rational, unsystematic expectation shocks into a standard New Keynesian small open economy model, calibrated and estimated on Russian data. This novel approach allows the identification of exogenous variation in inflation expectations specific to each agent type and the separate assessment of their influence on inflation.
The model shows that shocks to banks’ inflation expectations have a stronger impact on actual inflation than those of households or firms. This finding remains robust to an alternative model structure and parameter choices. The intuition lies in the role of financial institutions as providers of financing, which is essential for consumer and investment demand in a monetary economy.
The authors’ decomposition of impulse response functions reveals that banks’ credit decisions, driven by their expectations, exert a persistent influence on inflation dynamics—unlike similar decisions by households or firms. For example, if banks had previously expanded credit, inflation may remain elevated for some time, and this inertia is clearly visible in the model estimates based on Russian data.
Another important result is that the inflationary effects of expectation shocks from households and firms tend to be unpredictable from their own point of view. Actions based on their expectations influence the behavior, decisions, and expectations of other agents, including the central bank, often leading to inflation outcomes far from what was initially expected by households or firms. This points to the existence of an expectations-feedback gap for these agents, reflecting a disconnect in the transmission of their expectations to actual inflation dynamics.
The findings have several implications for monetary policy, especially in the context of communication strategy:
First, central banks should make use of expectation surveys and related indicators to detect situations where agents’ expectations diverge from the rational benchmarks. Timely identification of such expectation errors can help uncover their sources—whether due to informational asymmetries, sentiment shifts, or behavioral biases. This enables monetary policy to respond proactively and prevent destabilizing inflationary dynamics driven by unfounded expectations.
Second, communication efforts should focus more heavily on the financial sector. Aligning the expectations of financial intermediaries with the central bank’s goals is critical, as the mismatches in this sector exert the strongest influence on inflation. Clear guidance and credible monetary policy signals targeted at financial institutions can therefore help reinforce price stability.
Finally, central banks must continue to monitor and analyze the expectations of households and firms. While these are often less grounded in fundamentals, they can still trigger meaningful shifts in aggregate demand and price behavior. For example, unjustified fears of high inflation among consumers or businesses can lead to significant—though unexpected for them—changes in spending, wage demands, or pricing decisions. These channels require more attention.
In conclusion, by acknowledging the diversity of inflation expectations across banks, firms, and households, central banks can better anchor expectations and enhance the effectiveness of monetary policy in maintaining price stability.