The Dynamics of European Inflation Expectations

We investigate the relevance of the Carroll’s sticky information model of inflation expectations

for four major European economies (France, Germany, Italy and the United Kingdom). In contrast

to most 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 household and expert 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 which differ 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.