Inflation Announcements and Social Dynamics

54 Pages Posted: 7 Sep 2013 Last revised: 6 Apr 2017

See all articles by Kinda Hachem

Kinda Hachem

University of Chicago - Booth School of Business

Jing Cynthia Wu

University of Notre Dame - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2017

Abstract

We propose a new framework for understanding the effectiveness of central bank announcements when firms have heterogeneous inflation expectations. Expectations are updated through social dynamics and, with heterogeneity, not all firms choose to operate, putting downward pressure on realized inflation. Our model rationalizes why countries stuck at the zero lower bound have had a hard time increasing inflation with- out being aggressive. The same model also predicts that announcing an abrupt target to disinflate will cause inflation to undershoot the target whereas announcing gradual targets will not. We present new empirical evidence that corroborates this prediction.

Keywords: central bank communication, expectations heterogeneity, social dynamics, credibility, inflation targeting, quantitative easing

Suggested Citation

Hachem, Kinda and Wu, Jing Cynthia, Inflation Announcements and Social Dynamics (April 2017). Chicago Booth Research Paper No. 13-76, Available at SSRN: https://ssrn.com/abstract=2321281 or http://dx.doi.org/10.2139/ssrn.2321281

Kinda Hachem

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Jing Cynthia Wu (Contact Author)

University of Notre Dame - Department of Economics ( email )

Notre Dame, IN 46556
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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