Belief Distortions and Disagreement about Inflation

Fasani, Stefano and Patella, Valeria and Pagano Giorgianni, Giuseppe and Rossi, Lorenza (2025) Belief Distortions and Disagreement about Inflation. Working Paper. The Department of Economics, Lancaster.

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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.