Economic Literacy and Inflation Expectations: Evidence from a Laboratory Experiment

We present experimental evidence of a link between economic literacy and inflation forecast accuracy. The experiment investigates two channels through which economic literacy may enable better forecasts: (i) choice of information and (ii) use of information. More literate subjects choose more relevant information and use the given information more effectively. Starting from a 10th percentile score, the boost in literacy from taking an economics course predicts a 0.64 standard deviation decline in mean absolute forecasting error. Our findings suggest that a significant portion of demographic heterogeneity in inflation expectations—observed in survey data—may be driven by heterogeneity in economic literacy.