Public Information and Inflation Expectations in Developing Countries : Microeconometric Evidence from a Natural Experiment

Governments provide public information about economic conditions to reduce information imperfections and facilitate efficient allocation of resources. Do households in developing countries rely on public signals to inform themselves about market conditions? To identify the importance of public information in households' price expectations, we take advantage of a unique natural experiment in Ecuador where the published inflation rate had been different from the correct rate over a period of 14 months due to a software error. We find that the public signal about prices plays an important role in households' price expectations and the change in price expectations in turn affects their savings choices; the effect is stronger for better educated and older people