Inflation Announcements and Social Dynamics

Kinda Hachem and Jing Cynthia Wu

No 20161, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: E17 E3 E58 (search for similar items in EconPapers)
Date: 2014-05
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: EFG ME
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Citations: View citations in EconPapers (1)

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

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Journal Article: Inflation Announcements and Social Dynamics (2017)
Working Paper: Inflation Announcements and Social Dynamics (2013)
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