News on Inflation and the Epidemiology of Inflation Expectations

Authors

  • DAMJAN PFAJFAR,

  • EMILIANO SANTORO


  • We would like to thank the Editor, Pok-sang Lam, two anonymous referees, and Tiago Cavalcanti, Jagjit Chadha, Roberta Distante, Chryssi Giannitsarou, Sean Holly, Cars Hommes, Seppo Honkapohja, Ivan Petrella, and other participants in seminars and presentations at the University of Cambridge, Catholic University of Milan, University of Copenhagen, the Federal Reserve Board, Koc University, New Orleans University, Norges Bank, the IUE Conference (2007), the MMF Conference (2007), the Midwest Macroeconomics Meetings (2012), and the Workshop on Models of Expectation Formation and the Role of the News Media for Information Transmission at the University of Hamburg (2012) for their constructive comments. All remaining errors are our own.

Abstract

This paper examines the nexus between news coverage on inflation and households’ inflation expectations. In doing so, we test the epidemiological foundations of the sticky information model (Carroll 2003, 2006). We use both aggregate and household-level data from the Survey Research Center at the University of Michigan. We highlight a fundamental disconnection among news on inflation, consumers’ frequency of expectation updating, and the accuracy of their expectations. Our evidence provides at best weak support to the epidemiological framework, as most of the consumers who update their expectations do not revise them toward professional forecasters’ mean forecast.

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