Inflation expectations of the inattentive general public

Authored by Monique Reid

Date Published: 2015

DOI: 10.1016/j.econmod.2014.12.003

Sponsors: Economic Research Southern Africa

Platforms: No platforms listed

Model Documentation: Other Narrative

Model Code URLs: Model code not found

Abstract

Academic literature on central bank communication has tended to treat a central bank's audience as a single group, represented by the financial markets. However, recognising that a central bank's audience is heterogeneous is advantageous for both modelling purposes and effective central bank communication. This paper focuses on the general public, for whom gathering and processing information are costly. The general public makes rational decisions that limit the time and resources they allocate to the task. As a result, aggregate inflation expectations of the public can be described as `sticky' in that the spread of information about inflation through the economy is not instantaneous. Following Carroll (2003, 2006), epidemiological models are adopted to model the inflation expectations of the general public in South Africa and to estimate the speed at which they update their inflation expectations (information stickiness). Agent based models are then used to verify these estimates of information stickiness. (c) 2014 Elsevier B.V. All rights reserved.

Tags

Sticky information Disinflation