Information Flows and Disagreement

49 Pages Posted: 25 Sep 2012

See all articles by Cristian Badarinza

Cristian Badarinza

National University of Singapore (NUS)

Marco Gross

International Monetary Fund (IMF); European Central Bank (ECB)

Date Written: September 18, 2012

Abstract

The aim of this study is to assess the extent to which the degree of heterogeneity of inflation expectations is driven by the flow of information related to current and future price developments. To that end, we follow three routes: i) We propose different measures of information flow that have either a sender or a receiver perspective; ii) We present empirical results for the US and selected EU countries that aim to corroborate the hypothesis that news have the ability to densify expectations, i.e. to reduce forecast heterogeneity; and iii) We augment some otherwise standard models of expectation formation by allowing the individual updating frequency to depend on the observed measure of information flow; since the updating frequency is higher at times of high inflation and decreasing thereafter, this mechanism can contribute to upward biases in inflation expectations over long periods of time.

Keywords: heterogeneous beliefs, disagreement, public information

JEL Classification: D12, D84, E31, E37

Suggested Citation

Badarinza, Cristian and Gross, Marco, Information Flows and Disagreement (September 18, 2012). ECB Working Paper No. 1475. Available at SSRN: https://ssrn.com/abstract=2148383

Cristian Badarinza (Contact Author)

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

Marco Gross

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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