Left-Digit Bias in Household Inflation Expectations
93 Pages Posted: 23 Jun 2024
Date Written: June 21, 2024
Abstract
This paper theoretically defines and empirically tests left-digit bias in household inflation expectations. Using crosscountry data and a regression discontinuity design, we find that inflation expectations jump discontinuously when inflation crosses round-number thresholds, especially when inflation is rising. Media sensationalism is the primary channel through which these effects operate, as confirmed by instrumental variable estimates and a randomized controlled experiment. Embedding left-digit-biased expectations into a New Keynesian model reveals important macroeconomic and policy implications: weaker initial responses to shocks, prolonged inflationary periods, and the need for more persistent monetary policy.
Keywords: expectations formation, media, monetary policy, New Keynesian model, round-number thresholds
JEL Classification: C83
Suggested Citation: Suggested Citation