Heterogeneous Beliefs and the Phillips Curve

Heterogeneous beliefs modify the New Keynesian Phillips curve by introducing a term in the
cross-section distribution of expectations. We develop a novel functional data approach to
estimation and inference in survey-based Phillips curves that accounts for variation in
distributions of expectations, generalizing standard approaches. Our findings demonstrate
the statistical and economic importance of heterogeneous beliefs for inflation dynamics,
especially during periods of macroeconomic disruption. Our findings hold in similar form
across two major economies.