Disagreements in Consumer Inflation Expectations: Empirical Evidence for a Latin American Economy
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Disagreements in Consumer Inflation Expectations: Empirical Evidence for a Latin American Economy Juan Camilo Anzoátegui‑Zapata1 · Juan Camilo Galvis‑Ciro2 Received: 24 January 2020 / Accepted: 8 August 2020 © Springer Nature Switzerland AG 2020
Abstract In this study, the Internet is considered an important source of information used by consumers to form inflation expectations. Based on this idea, this study investigates the effects of word searches related to the central bank, market basket, and living cost on disagreements in consumer expectations. The case of Colombia is analyzed because it is a small emerging economy under inflation targeting policy that con‑ ducts surveys to monitor consumer expectations. The methodology consists of using search volume indices on the Google Trends platform to identify effects on expec‑ tation disagreement. The econometric results of this study show that information found by consumers on Google can reduce disagreements in inflation expectations. Consequently, the main policy recommendation is that the Central Bank of Colom‑ bia should augment the communication it provides to the public through various digital platforms, as a method to anchor expectations. Keywords Disagreements · Inflation expectations · Communication JEL Classification E37 · E58 · E61
1 Introduction Central banks are focusing more on understanding the formation of inflation expec‑ tations of market agents to improve the transmission mechanisms and effectiveness of monetary policy (Coibion et al. 2020). Expectations management in an inflation * Juan Camilo Galvis‑Ciro [email protected] Juan Camilo Anzoátegui‑Zapata [email protected] 1
Department of Economics, Universidad Autónoma Latinoamericana, Carrera 55A No. 49‑51, Medellín, Colombia
2
Department of Economics, Universidad Pontificia Bolivariana, Circular 1 No. 70‑01, Medellín, Colombia
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Vol.:(0123456789)
Journal of Business Cycle Research
targeting regime is essential for controlling prices because these reflect the expected behavior of the economy. In this regard, consumers are the agents with the highest influence on aggregate demand, and consequently, anchoring their expectations is key for central banks that want to strengthen their credibility (Coibion et al. 2019). Although increased anchoring is seen on average in inflation expectations, some issues still subsist due to heterogeneity between agents and, especially, to significant differences between inflation expectations of the so-called experts, or professionals, and other agents, such as consumers. In that respect, recent evidence shows that con‑ sumers make predictions with information from mainstream media and that their expectations have more dispersion, inertia and instability (Lamla and Lein 2014, 2015; Dräger and Lamla 2017). Due to high opportunity costs, consumers seek to absorb accurate and easy to understand information from communication channels that are not those used regu‑ larly and directly by the central bank (Sims 2003; Carroll 2003; Blinder a
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