Disagreement about inflation expectations and monetary policy transmission

Clear, Consistent and Engaging: ECB Monetary Policy Communication in a Changing World

“…A recent randomised controlled experiment using a Deutsche Bundesbank online survey of households' expectations showed that, following announcements about expansionary economic measures by fiscal authorities and/or the ECB, households revised their expectations about economic growth and personal income downwards and gave more uncertain estimates (see Box 2 and Goldfayn-Frank et al, 2020). These results are in line with certain elements in the literature on the signalling effects of policy announcements (Melosi, 2017;Falck et al, 2021).…”

“…When price-setting firms have more noisy information about the economy than the central bank, a change in interest rates is harder to distinguish as being a reaction to supply-driven or to demand-driven factors and may induce firms to change their prices in undesired ways (Melosi, 2017). Furthermore, in times when there is more noisy information, as measured by heightened disagreement about inflation expectations, the adverse signalling effect becomes stronger, whereas these signalling effects disappear when disagreement is low (Falck et al, 2021). Overall, when disagreement about inflation expectations is elevated, there is more scope for perverse price reactions to monetary policy decisions.…”

“…In other words, households might think that if the ECB or the German Federal Government announce such a policy, the situation must be worse than they had thought. This is sometimes referred to as a "signalling" or "information" effect (see Melosi, 2017;Falck et al, 2021;Nakamura and Steinsson, 2018;Kerssenfischer, 2019). Our results are consistent with such a narrative.…”

Revisiting the inflation perception conundrum

“…Nothing is probably more important for monetary and macroeconomic stability than well-anchored inflation expectations. Inflation expectations are a crucial determinant of actual inflation, and heterogeneity in inflation expectations might matter to the monetary-policy transmission (Woodford, 2003;Falck, Hoffmann and Hürtgen, 2019). Information on consumers' inflation perceptions and expectations is therefore of huge interest for central banks and monetary authorities.…”

Indirect Consumer Inflation Expectations

“…9. The decline in the level of agreement among respondents who report zero percent is associated with increases in CPI inflation in the United States, a situation hinting at a positive relationship between disagreement and inflation over time and echoing evidence provided by Falck et al (2021).…”