Communication and the Beliefs of Economic Agents

Abstract

New surveys provide a wealth of information on how economic agents form their expectations and how those expectations shape their decisions. We review recent evidence on how changes in macroeconomic expectations, particularly inflation expectations, affect households' and firms' actions. We show that the provision of information about inflation to households and firms can sometimes backfire in terms of their subsequent decisions. Whether or not this is the case hinges on how individuals interpret the news about inflation: supply-side interpretations ("inflation is bad for the economy") lead to negative income effects, which can depress economic activity. We show that households in advanced economies, unlike professional forecasters, typically have such a supply-side interpretation, as do many firms. New communication strategies could avoid public misinterpretation of policy decisions.

Inflation Expectations in the Euro Area: Indicators, Analyses and Models Used at Banca d’Italia

“…According to a study by Bd'I staff (Rondinelli and Zizza, 2020), there is empirical evidence based on SHIW data that two different regimes have characterized the Italian economy: during the recent period of low inflation, households with higher inflation expectations have reported a lower readiness to purchase durables when compared to the other households, as the income effect has prevailed. This evidence is in line with the estimates in Coibion et al (2019) and the income effect argument also raised by Candia et al (2020): if inflation is viewed as having supply-side origins, and thus is associated with bad economic conditions, households who expect higher inflation may reduce their spending. On the contrary, during the high inflation of the early 90s, full wage-indexation has neutralized the income effect: only substitution has mattered, so that households with higher inflation expectations have anticipated expenditure more than the others.…”

“…First, sociodemographic characteristics play a key role: women, lower income earners and individuals with lower level of education tend to perceive and expect higher levels of inflation Santoro 2008, Del Giovane et al (2009), Binder 2015, Arioli et al 2017, among others). Second, households' beliefs about inflation appear consistent with a supply-side narrative (Candia et al 2020): when consumers perceive a deterioration in the general economic situation, they raise their inflation perceptions or expectations. 6 Relatedly, consumers with pessimistic attitudes about the macroeconomy or their economic or financial situation are likely to have higher inflation expectations (Ehrmann et al 2017).…”

How Economic Crises Affect Inflation Beliefs: Evidence from the COVID-19 Pandemic

“…While most of this literature focuses on the relationship between inflation expectations and households' economic behavior (e.g. Armantier et al 2015, Crump et al 2015, D'Acunto, Hoang, and Weber 2018, Coibion et al 2019, Candia et al 2020, a few papers have investigated the role of inflation uncertainty. This includes Binder (2017), who finds that consumers with higher inflation uncertainty are more reluctant to purchase durable goods, which is consistent with a precautionary savings channel.…”

Firms' Inflation Expectations and Pricing Strategies During Covid-19

“…Coibion et al, 2020 conclude that Italian firms with higher inflation expectations raise prices and reduce employment and capital more than those with lower expectations. 11 These findings support a stagflationary view of inflation (as in Candia et al, 2020). By contrast, using a period-by-period analysis rather than a panel regression, Rosolia, 2020 does not find a significant causal effect of inflation expectations on price decisions.…”