Consumers’ Inflation Expectations in Russia and the US: Testing the Diagnostic Expectations Hypothesis

Abstract

The paper conducts empirical testing of the diagnostic expectations theory using data on consumer inflation expectations in Russia and the US, and examines whether the ‘diagnosticity’ of expectations depends on macroeconomic parameters. The results indicate a statistically significant negative correlation between the forecast error (the difference between actual and expected inflation) and the forecast revision indicator, which supports the diagnostic expectations theory. Estimating a pseudo-panel compiled from US data shows that the ‘diagnostic’ nature of expectations is relatively stable over time and does not depend on macroeconomic parameters. The result can be interpreted as follows: the effect of pro-inflationary factors increases expected inflation more than actual inflation, and this feature of expectations is relatively stable over time.