Information-Induced Heteroscedasticity in Price Expectations Data

This study tests the hypothesis that price expectations differ across individuals because they acquire different information about inflation. If price information is a normal good, then the amount of price information acquired will vary across individuals according to income, education, and other demand-specific variables, causing price expectations to be heteroscedastic with respect to these variables. Utilizing monthly household survey data, we test the heteroscedasticity hypothesis and find support for the differential information model. In addition, we develop a novel method of incorporating the "don't know" response to questions about inflation into the estimation of price expectations.