ESRI Discussion Paper Series No.280
Inflation Expectations of Japanese Households:Micro Evidence from a Consumer Confidence Survey

Masahiro Hori
Hitotsubashi University, and Economic and Social Research Institute, Cabinet Office
Masaaki Kawagoe
Cabinet Office


Economists unanimously agree that economic agents' expectations are crucially important in determining macroeconomic outcomes. However, mainstream macroeconomists usually simply assume that expectations are rational, leaving unexamined the fundamental question whether individual agents' actual expectations are rational or not. Against this background, this study examines the properties of Japanese households' inflation expectations using micro-based inflation expectations data from the Monthly Consumer Confidence Survey Covering All of Japan. Our analyses show that actual inflation expectations by Japanese households are not rational in the sense that they are upward biased, at least ex post, and individual households appear not to instantaneously incorporate into their expectations information that is freely available from news reports on the views of professional forecasters. Our findings, moreover, suggest that while the sticky information model appears to better explain inflation expectations dynamics (than rational expectations models), we encounter a handful of facts that look inconsistent with the simple model.

Structure of the whole text(PDF-Format 1 File)

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  2. Abstract
  3. page2
    1. Introduction
  4. page4
    2. Empirical Model Derivation
  5. page7
    3. Data Sources
    1. page7
      3.1 Monthly Consumer Confidence Survey (MCCS)
    2. page9
      3.2 Monthly Survey of Japanese Economic Forecasts (ESPF)
    3. page9
      3.3 Preliminary Overview of the Data
  6. page11
    4. Empirical Analysis
    1. page11
      4.1 Can the Professional Forecasts Serve as an Anchor?
    2. page13
      4.2 Estimating the Empirical Model
    3. page15
      4.3 Can Sticky Information Explain Disagreement About Inflation Expectations?
  7. page17
    5. Conclusion
  8. page19
  9. page21
    Appendix A. The Monthly Consumer Confidence Survey Covering All of Japan (MCCS)
    1. page21
      A.1. General Information
    2. page21
      A.2. The Questionnaire
    3. page22
      A.3. Characteristics of Respondents
    4. page22
      A.4. Change in the Survey Method
  10. page23
    Appendix B. Monthly Survey of Japanese Economic Forecasts (ESP Forecast, or ESPF)
  11. page25
    Table 1. Expected annual inflation (survey responses) and realized annual CPI inflation rate
  12. page26
    Table 2. Performance of individual household expectations relative to the mean of professional forecasts
  13. page27
    Table 3. Forecasting power of the mean of household expectations and the mean professional forecasts
  14. page28
    Table 4. The impact of the mean of professional forecasts on individual household expectations
  15. page29
    Table 5. Estimating and testing the mean inflation expectations model (8)
  16. page30
    Table 6. Micro data based regressions of inflation expectation dynamics
  17. page32
    Table 7. How well can the sticky information model explain disagreement in inflation expectations?
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    Table 8. Probit model of inflation expectation updates
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    Figure 1. Average inflation expectations and actual inflation by survey (from 2001 to 2009)
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    Figure 2. Distribution of the average no. of months between expectation updates
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    Table A.1. Basic statistics of the characteristics of the households surveyed
  22. page37
    Table A.2. Questions in the ESPF
  23. page38
    Table A.3. Timing of the surveys: ESPF (professional) vs. MCCS (households)
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