How do consumers adapt to a new environment in their economic forecasting? Evidence from the German Reunification
- Exploiting the natural experiment of the German reunification, we examine how consumers adapt to a new environment in their macroeconomic forecasting. We document that East Germans expect higher in inflation and make larger forecast errors than West Germans even decades after reunification. Differences in consumption baskets, financial literacy, risk aversion or trust in the central bank cannot fully account for these patterns. We find most support for the explanation that East Germans, who were used to a strong norm of zero inflation, persistently overadjusted the level of their expectations in the face of the initial inflation shock in reunified Germany. Our findings suggest that large changes in the economic environment can permanently impede people's ability to form accurate macroeconomic expectations, with an important role for the interaction of old norms and new experiences around the event.
| Author: | Olga Goldfayn-FrankGND, Johannes WohlfartORCiDGND |
|---|---|
| URN: | urn:nbn:de:hebis:30:3-488047 |
| URL: | https://www.imfs-frankfurt.de/de/forschung/imfs-working-papers.html |
| Parent Title (English): | Working paper series / Institute for Monetary and Financial Stability ; 129 |
| Series (Serial Number): | Working paper series / Institute for Monetary and Financial Stability (129) |
| Publisher: | Johann Wolfgang Goethe-Univ., Inst. for Monetary and Financial Stability |
| Place of publication: | Frankfurt am Main |
| Document Type: | Working Paper |
| Language: | English |
| Year of Completion: | 2018 |
| Year of first Publication: | 2018 |
| Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
| Release Date: | 2019/03/05 |
| Tag: | German Reunification; expectation formation; inflation; macroeconomic experiences; natural experiment |
| Page Number: | 68 |
| HeBIS-PPN: | 447171747 |
| Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
| Wissenschaftliche Zentren und koordinierte Programme / Institute for Monetary and Financial Stability (IMFS) | |
| Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) | |
| Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE) | |
| Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
| Sammlungen: | Universitätspublikationen |
| Licence (German): |  Deutsches Urheberrecht |
