International Finance Discussion Papers (IFDP)
July 2025
What Determines Household Expectations?
Anushka Mitra and Aditi Singh
Abstract:
This paper examines which macroeconomic signals shape household expectations and finds that unemployment shocks play a more influential role than inflation shocks. Using daily data, we identify which announcements prompt households to revise their expectations. We construct two shock series—assuming households are either sophisticated or naive—based on the surprise components of announcements. Labor market news strongly influences both general economic sentiment and inflation expectations. Even when inflation rises and unemployment falls, households respond more to unemployment shocks. Most changes in inflation expectations are driven by labor market shocks. During negative supply and demand shocks, unemployment remains the dominant driver.
Keywords: Household expectations, macroeconomic data releases, high-frequency identification, survey data
DOI: https://doi.org/10.17016/IFDP.2025.1412
PDF: Full Paper
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