Inflation expectations under public information uncertainty : the role of information sets

Abstract

The paper develops an overlapping generation monetary model of adaptive learning with two main features: an informational friction and a mapping between information sets and the learning mechanism. The informational friction is introduced to capture situations in which individuals are uncertain about the current state of the general price level---they only observe a subsample of all prices--- but need to form expectations about the evolution of future prices. The mapping describes the way in which individuals decide their set of relevant information that then use to form inflation expectations or, more precisely, how they form perceptions about the current state of the general price level. Model main prediction is that idiosyncratic information on prices affects inflation expectations, especially when public information is not fully credible, or it is inaccurate. I apply the model to explain a relevant feature of expectations in Argentina (2007-2014): systematically divergence across income groups.