Working Paper: NBER ID: w27800
Authors: Bernardo Candia; Olivier Coibion; Yuriy Gorodnichenko
Abstract: New surveys provide a wealth of information on how economic agents form their expectations and how those expectations shape their decisions. We review recent evidence on how changes in macroeconomic expectations, particularly inflation expectations, affect households’ and firms’ actions. We show that the provision of information about inflation to households and firms can sometimes backfire in terms of their subsequent decisions. Whether or not this is the case hinges on how individuals interpret the news about inflation: supply-side interpretations (“inflation is bad for the economy”) lead to negative income effects, which can depress economic activity. We show that households in advanced economies, unlike professional forecasters, typically have such a supply-side interpretation, as do many firms. New communication strategies could avoid public misinterpretation of policy decisions.
Keywords: Inflation Expectations; Economic Agents; Monetary Policy Communication
JEL Codes: E2; E3; E4; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher inflation expectations (E31) | increased spending by households (D12) |
| higher inflation expectations (E31) | reduced spending by households (D12) |
| higher inflation expectations (E31) | lower employment and investment by firms (H32) |
| inflation expectations interpretation (E31) | economic decisions (G11) |
| information provision about inflation (E31) | unintended consequences (reduced spending) (H56) |
| inflation expectations (E31) | economic behavior (D22) |
| higher inflation expectations (E31) | reduced spending (H56) |