Quantifying Heterogeneous Survey Expectations: The Carlson-Parkin Method Revisited

We propose a generalized ordered response model that nests the popular Carlson-Parkin (CP) method to quantify household inflation expectations while explicitly control for cross-sectional heterogeneity in the threshold parameters and the variance. By matching qualitative and quantitative data from 1979 to 2012 from the University of Michigan’s Survey of Consumers, we find evidence against the threshold constancy, symmetry, and homogeneity assumptions of the CP method. We show that the quantified expectations produced by the generalized model outperform those produced by the CP method, most notably during the 2008 recession period. We also show that when an rolling-window identification scheme is employed instead of the unbiasedness assumption over the entire sample, quantified expectations are significantly better in terms of predictive accuracy when compared with the quantitative expectations reported in the survey. JEL Classification: C25, C43, D84, E31