Asymmetric information and misaligned inflation expectations

Recent survey evidence reveals misaligned inflation expectations among economic agents. While households associate higher expected inflation with lower output growth, professional forecasters link higher future inflation to higher output growth. Firms’ expectations display neither negative nor positive correlations. We explain such patterns jointly in a general equilibrium New Keynesian framework. Asymmetric information arises naturally as (i) households and firms receive imperfect, asymmetric information about supply and demand shocks, and (ii) the central bank learns from equilibrium outcomes (i.e., output and inflation) as opposed to the private sector. Survey data help uncover the magnitudes of information frictions among economic agents.