Connecting the dots: How social networks shape expectations through economic narratives

Rafael Kothe

No 204, BERG Working Paper Series from Bamberg University, Bamberg Economic Research Group

Abstract: This paper investigates how social network and conformity dynamics shape the stability of inflation expectations and the dissemination of economic narratives. Using an agent-based macroeconomic simulation, I integrate a heuristic switching framework with an opinion dynamics mechanism to examine the impact of targeted narrative dissemination by highly central agents on expectation dispersion. The computational experiments reveal that when influential network actors transmit the central bank's inflation narrative, both inflation rate dispersion and the dispersion of expectations are substantially reduced. Conversely, when distorting narratives spread through these key nodes, it requires very high persuasion levels to significantly amplify instability. Moreover, impulse response analyses show that stronger social influence accelerates convergence toward rational expectations following shocks, thereby mitigating both the magnitude and persistence of deviations. However, heightened persuasion can also weaken the link between expectations and underlying fundamentals, as agents increasingly align with dominant narratives rather than economic signals. Overall, these findings underscore the dual role of social networks in monetary policy communication, capable of both anchoring expectations and amplifying destabilising narratives.

Keywords: Expectations; Economic Narratives; Network Effects; Behavioral Macroeconomics; Agent-Based Modeling; Monetary Policy Communication (search for similar items in EconPapers)
JEL-codes: D83 D84 D85 E52 E71 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-cba, nep-mon and nep-soc
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bamber:319882

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