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Inflation Expectations of the Inattentive General Public

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  • Monique Reid

    () (Department of Economics, University of Stellenbosch)

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.

Suggested Citation

  • Monique Reid, 2012. "Inflation Expectations of the Inattentive General Public," Working Papers 08/2012, Stellenbosch University, Department of Economics.
  • Handle: RePEc:sza:wpaper:wpapers160
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Pierdzioch, Christian & Reid, Monique B. & Gupta, Rangan, 2016. "Inflation forecasts and forecaster herding: Evidence from South African survey data," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 62(C), pages 42-50.
    2. Kabundi, Alain & Schaling, Eric & Some, Modeste, 2015. "Monetary policy and heterogeneous inflation expectations in South Africa," Economic Modelling, Elsevier, vol. 45(C), pages 109-117.
    3. Monique Reid & Gideon Rand, 2015. "A Sticky Information Phillips Curve for South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 83(4), pages 506-526, December.
    4. repec:spr:portec:v:16:y:2017:i:3:d:10.1007_s10258-017-0129-x is not listed on IDEAS
    5. Li, Shaoyu & Wei, Lijia & Xu, Zhiwei, 2017. "Dynamic asset allocation and consumption under inflation inequality: The impacts of inflation experiences and expectations," Economic Modelling, Elsevier, vol. 61(C), pages 113-125.
    6. Christian Pierdzioch & Monique B. Reid & Rangan Gupta, 2014. "On the Directional Accuracy of Inflation Forecasts: Evidence from South African Survey Data," Working Papers 24/2014, Stellenbosch University, Department of Economics.
    7. Xu, Yingying & Chang, Hsu-Ling & Lobonţ, Oana-Ramona & Su, Chi-Wei, 2016. "Modeling heterogeneous inflation expectations: empirical evidence from demographic data?," Economic Modelling, Elsevier, vol. 57(C), pages 153-163.

    More about this item

    Keywords

    South Africa; sticky information; inflation expectations; inattentive general public;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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