Raghuram Rajan: prediction

Transcript context

…What’s the most underrated idea in monetary theory? Let me tell you what is the most difficult concept. So, I’ll answer a different question. It is how people’s expectations form. See, modern textbooks are full of “you said this” and “people will think that” and “therefore we will have an effect.” But how many people actually think about inflation? How many people actually know what inflation is out there? In India, we found that in our surveys, the median inflation rate that people said was going on was about 10 percentage points higher than the highest rate had been for the last 10 years. So people don’t really have a good sense of what those numbers are. Yet we focus on them because, ultimately, we think changing those expectations matters. And by the way, this is true even of industrial countries. The expectation of inflation is typically higher than what it actually is measured to be. So why is there this very strong link to expectations that we have in our theories, but in practice how they formed is really a mystery? How do people on the street actually gauge inflation? Because they don’t read the financial papers. They don’t pay attention to the inflation numbers that appear on Bloomberg or whatever. How do they actually react? If people don’t know what inflation means, should we then move to NGDP targeting?…

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