Communication and the Beliefs of Economic Agents
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.
We are grateful to Jake Lyons for research assistance and Dimitris Georgarakos, Edward Knotek, Tiziano Ropele and Raphael Schoenle for sharing figures for this project. We thank Edward Knotek and Claudia Sahm for feedback on an earlier version of the paper. This research was funded in part by National Science Foundation grant 1530467. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.