Template-Type: ReDIF-Paper 1.0
Author-Name: Stefano Fasani
Author-Name-First: Stefano
Author-Name-Last: Fasani
Author-Name: Valeria Patella
Author-Name-First: Valeria
Author-Name-Last: Patella
Author-Name: Giuseppe Pagano Giorgianni
Author-Name-First: Giuseppe
Author-Name-Last: Pagano Giorgianni
Author-Name: Lorenza Rossi
Author-Name-First: Lorenza
Author-Name-Last: Rossi
Title: Belief Distortions and Disagreement about Inflation
Abstract: This paper investigates the macroeconomic effects of a belief distortion shock—an unexpected increase in the wedge between household and professional forecaster inflation expectations. Using survey and macro data alongside machine-learning techniques, we identify this shock and examine its effects within and outside the ZLB, while conditioning on the degree of inflation disagreement. The shock increases unemployment during normal times, whereas it reduces it in the ZLB, when the monetary stance is accommodative. Inflation disagreement instead dampens the expansionary effects of the shock. A New Keynesian model with belief distortion shocks replicates these dynamics and reproduces the inflation disagreement empirical patterns. 
Creation-Date: 2025
File-URL: http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/LancasterWP2025_007.pdf
File-Format: application/pdf
Number: 423478673
Classification-JEL: E31, C220, D840, C320
Keywords: Inflation, Belief Distortion Shock, Inflation Disagreement, Households Expectation, Machine Learning, Local Projections, New Keynesian model, Monetary Policy, ZLB
Handle: RePEc:lan:wpaper:423478673