TY - JOUR
T1 - Expectation formation in a new environment
T2 - Evidence from the German reunification
AU - Goldfayn-Frank, Olga
AU - Wohlfart, Johannes
PY - 2020/11
Y1 - 2020/11
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 - German reunification
KW - Inflation
KW - Macroeconomic experiences
KW - Natural experiment
U2 - 10.1016/j.jmoneco.2019.08.001
DO - 10.1016/j.jmoneco.2019.08.001
M3 - Journal article
AN - SCOPUS:85070889065
SN - 0304-3932
JO - Journal of Monetary Economics
JF - Journal of Monetary Economics
ER -