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 often link higher future inflation to stronger economic fundamentals and 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 inattentive private sector. Survey data help uncover the magnitudes of information frictions among economic agents. Asymmetric information has profound implications for business cycles and central bank communication