Inflation Announcements and Social Dynamics

NBER Working Paper No. 20161

Issued in May 2014, Revised in April 2017

NBER Program(s):Economic Fluctuations and Growth, Monetary Economics



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 without 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.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w20161

Published: KINDA HACHEM & JING CYNTHIA WU, 2017. "Inflation Announcements and Social Dynamics," Journal of Money, Credit and Banking, vol 49(8), pages 1673-1713. citation courtesy of

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