NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Inflation Announcements and Social Dynamics

Kinda Hachem, Jing Cynthia Wu

NBER Working Paper No. 20161
Issued in May 2014, Revised in April 2017
NBER Program(s):   EFG   ME

We propose a new framework for understanding the effectiveness of central bank announcements when firms have heterogeneous inflation expectations. Expectations are updated through social dynamics and, with heterogeneity, not all firms choose to operate, putting downward pressure on realized inflation. Our model rationalizes why countries stuck at the zero lower bound have had a hard time increasing inflation without being aggressive. The same model also predicts that announcing an abrupt target to disinflate will cause inflation to undershoot the target whereas announcing gradual targets will not. We present new empirical evidence that corroborates this prediction.

download in pdf format
   (606 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w20161

Users who downloaded this paper also downloaded* these:
Banerjee, Meng, Porzio, and Qian w20050 Aggregate Fertility and Household Savings: A General Equilibrium Analysis using Micro Data
Calvo, Coricelli, and Ottonello w19683 Jobless Recoveries During Financial Crises: Is Inflation the Way Out?
Del Negro, Giannoni, and Schorfheide w20055 Inflation in the Great Recession and New Keynesian Models
Alvarez, Le Bihan, and Lippi w20155 Small and Large Price Changes and the Propagation of Monetary Shocks
Wu and Xia w20117 Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us