Expectation Formation in a New Environment: Evidence from the German Reunification

TY - UNPB

T1 - Expectation Formation in a New Environment: Evidence from the German Reunification

AU - Goldfayn-Frank, Olga

AU - Wohlfart, Johannes

PY - 2017/9/20

Y1 - 2017/9/20

N2 - Exploiting the German reunification, we study how households adapt to a new environment in their macroeconomic forecasting. East Germans expect higher inflation than West Germans decades after reunification. These differences are likely driven by the persistent effect of the inflation shock after reunification, which contrasted strongly with experiences of zero inflation in the GDR. East Germans' higher inflation expectations are reflected in higher consumer debt and lower bond holdings. Our findings suggest that large changes in the environment can permanently impede people's ability to form expectations, with an important role for the interaction of experiences before and after the event.

AB - Exploiting the German reunification, we study how households adapt to a new environment in their macroeconomic forecasting. East Germans expect higher inflation than West Germans decades after reunification. These differences are likely driven by the persistent effect of the inflation shock after reunification, which contrasted strongly with experiences of zero inflation in the GDR. East Germans' higher inflation expectations are reflected in higher consumer debt and lower bond holdings. Our findings suggest that large changes in the environment can permanently impede people's ability to form expectations, with an important role for the interaction of experiences before and after the event.

KW - Expectation Formation

KW - Inflation

KW - Natural Experiment

KW - German Reunification

KW - Macroeconomic Experiences

U2 - 10.2139/ssrn.3037525

DO - 10.2139/ssrn.3037525

M3 - Working paper

BT - Expectation Formation in a New Environment: Evidence from the German Reunification

ER -