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Inflation Expectations of the Inattentive General Public

Monique Reid

No 08/2012, Working Papers from Stellenbosch University, Department of Economics

Abstract: The majority of academic research on central bank communication has analysed a central bank’s audience as a single group. Analyses, especially empirical research, have focused almost exclusively on a central bank’s interaction with the financial markets, facilitated by the availability of high-quality, high-frequency asset price data. In practice, a central bank’s audience is heterogeneous, and recognising this is advantageous for both modelling purposes and effective central bank communication. Many central banks use a range of communication tools to reach their various audiences, but little formal analysis has been conducted to guide policy design and communication strategies. Gathering and processing information are costly for the general public, so they make rational decisions that limit the time and resources they allocate to these tasks. As a result, aggregate inflation expectations of the public as a whole can be described as ‘sticky’ in that the spread of information about inflation expectations through the economy is not instantaneous. A body of literature has emerged over the past decade, led by Mankiw and Reis (2001), who developed the Sticky Information Phillips Curve (SIPC), and Carroll (2002, 2003), who proposed microfoundations for the SIPC. This paper follows Carroll (2002, 2003) in adopting epidemiological models to provide insight into how the general public in South Africa forms its inflation expectations. This enables an estimation of the speed at which the South African general public updates its inflation expectations (information stickiness). Agent-based models, which explain the complex aggregate inflation expectations of the general public from the agent level upwards, are then used to verify these estimates of information stickiness and explore the microfoundations of aggregate inflation expectations.

Keywords: South Africa; sticky information; inflation expectations; inattentive general public (search for similar items in EconPapers)
JEL-codes: D82 D83 E31 E52 E58 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-afr, nep-cba and nep-mon
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Journal Article: Inflation expectations of the inattentive general public (2015) Downloads
Working Paper: Inflation Expectations of the Inattentive General Public (2012) Downloads
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