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  5. The Inflation Attention Threshold and Inflation Surges

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

The Inflation Attention Threshold and Inflation Surges

  • Oliver Pfäuti
American Economic Review (Forthcoming)

Abstract

The recent inflation surge brought inflation back on people’s minds. I quantify when and how much attention to inflation changes and derive the macroeconomic implications of these attention changes. I estimate an attention threshold at an inflation rate of 4 percent, that attention doubles when inflation exceeds this threshold, and that supply shocks have stronger and more persistent effects on inflation in times of high attention. Developing a model featuring the attention threshold, I show that attention changes offer a joint explanation for inflation surges, inflation’s co-movement with inflation expectations, and a long last mile of disinflation.

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