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Central Bank Communications and Management of Expectations

Paper Session

Friday, Jan. 3, 2020 2:30 PM - 4:30 PM (PDT)

Marriott Marquis, Del Mar
Hosted By: Econometric Society
  • Chair: Michael McMahon, University of Oxford

The Hidden Heterogeneity of Inflation Expectations and Its Implications

Lena Dräger
,
Leibniz University Hannover
Michael Lamla
,
University of Essex
Damjan Pfajfar
,
Federal Reserve Board

Abstract

Using a new consumer survey dataset, we document a new dimension of heterogeneity in inflation expectations that has implications for consumption and saving decisions as well as monetary policy transmission. We show that German households with the same inflation expectations differently assess whether the level of expected inflation and of nominal interest rates is appropriate or too high/too low. The `hidden heterogeneity' in expectations stemming from these opinions is related to demographic characteristics and affects current and planned spending in addition to the Euler equation effect of the perceived real interest rate.

Central Bank Announcements: Big News for Little People?

Michael Lamla
,
University of Essex
Dmitri Vinogradov
,
University of Glasgow

Abstract

Little is known on how and whether central bank announcements affect consumers' beliefs about policy relevant economic figures and through them also their consumption/savings decisions. This paper focuses on consumers' perceptions and expectations of inflation and interest rates and confidence therein. Based on a sound identification (running surveys shortly before and after communication events), and relying on above 15 000 observations, spanning over 12 Fed press conferences between December 2015 and June 2018, we document the impact of the central bank communication on ordinary people. While announcement events have little measurable direct effect on average beliefs, they make people more likely to receive news about the central bank's policy. Conditioned on consumers' exposure to news, the direct effect is statistically and economically significant: informed consumers adjust and improve beliefs and become more confident in them.

Monetary Policy Communications and Their Effects on Household Inflation Expectations

Michael Weber
,
University of Chicago
Olivier Coibion
,
University of Texas-Austin
Yuriy Gorodnichenko
,
University of California-Berkeley

Abstract

We study how different forms of communication influence inflation expectations in a randomized controlled trial using nearly 20,000 U.S. individuals. We solicit individuals’ inflation expectations in the Nielsen Homescan panel then provide eight different forms of information regarding inflation. Reading the actual Federal Open Market Committee (FOMC) statement has about the same average effect on expectations as simply being told about the Federal Reserve’s inflation target. Reading a news article about the most recent FOMC meetings results in a forecast revision which is smaller by half. Our results have implications for how central banks should communicate to the broader public.

Managing Expectations: Instruments vs. Targets

George-Marios Angeletos
,
Massachusetts Institute of Technology
Karthik Sastry
,
Massachusetts Institute of Technology

Abstract

Should a policymaker offer forward guidance in terms of the intended path for the policy instrument (e.g., keep the Federal Funds rate at a low level for τ periods) or a target for the equilibrium outcome of interest (e.g., bring unemployment down to y%)? We study how the optimal approach depends on plausible bounds on agents’ depth of knowledge and rationality. Agents make mistakes in predicting the behavior of others and the GE effects of policy. An optimal communication strategy minimizes the welfare consequences of such mistakes. This is achieved by offering guidance in terms of a sharp outcome target if and only if the GE feedback is strong enough. Our results suggest that central banks should stop talking about interest rates and start talking about unemployment when faced with a prolonged liquidity trap, a steep Keynesian cross, or a large financial accelerator.

Does the Public Understand Policy Uncertainty?

Michael McMahon
,
University of Oxford

Abstract

See attached.
JEL Classifications
  • D8 - Information, Knowledge, and Uncertainty
  • E3 - Prices, Business Fluctuations, and Cycles