Left-Digit Bias in Household Inflation Expectations

93 Pages Posted: 23 Jun 2024

See all articles by Marcel Garz

Marcel Garz

Jonkoping University - Jonkoping International Business School (JIBS)

Benjamin Larin

Jönköping University - Jönköping International Business School

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

Garz, Marcel and Larin, Benjamin, Left-Digit Bias in Household Inflation Expectations (June 21, 2024). Available at SSRN: https://ssrn.com/abstract=4872279 or http://dx.doi.org/10.2139/ssrn.4872279

Marcel Garz (Contact Author)

Jonkoping University - Jonkoping International Business School (JIBS) ( email )

Jönköping, 55111
Sweden

Benjamin Larin

Jönköping University - Jönköping International Business School ( email )

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