Seeing Through Different Lenses: Partisanship and Updating of Inflation Expectations

Abstract

In an incentivized survey experiment with 1080 U.S. households, we study how Republican and Democrat participants update their inflation expectations. Households' inflation beliefs can either enhance or diminish the effectiveness of the Fed's monetary tightening policies aimed at taming inflation. We document that households hold different prior inflation beliefs across partisan lines. We provide economic information by exogenously changing its tone ("good" or "bad" news) and source (No Source, CNN, or Fox) and elicit posterior inflation beliefs. Our research design allows us to map the belief-updating process when partisans are exposed to politically congruent or misaligned news sources. Participants exhibit asymmetric belief updating and tend to overreact to economic information with respect to the Full Information Rational Expectation (FIRE) and Bayesian benchmarks. This effect is stronger when Republicans receive news pieces from CNN. However, belief updating is more symmetric and closer to the FIRE and Bayesian benchmarks in the No Source condition, where the information source is not disclosed. Our study highlights the importance of using non-partisan media sources for communicating monetary policy goals and strategies to the public.

Keywords: Inflation, information tone, information source, asymmetric reaction, Bayesian updating, belief entropy, experiment.

JEL Classification: E71, C90, D84, E52.