Updating Inflation Expectations

This paper investigates how inflation expectations evolve. In particular, we analyze the time-varying nature of the propensity to update expectations and its potential determinants. For this purpose we set up a flexible econometric model that tracks the formation of inflation expectations of consumers at each moment in time. We show that the propensity to update inflation expectations changes substantially over time and is related to the quantity and the quality of news

Consumers' macroeconomic expectations

After the financial crisis of 2008, central banks around the world have increased their communication efforts to reach consumers, with the aim of both guiding and anchoring their inflation expectations. For the expectations channel of monetary policy to work as intended, central banks need a thorough understanding of the formation process of expectations by the general public and of the relationship between expectations and economic choices. This warrants reliable and detailed data on consumers' expectations of macroeconomic variables such as inflation or interest rates. We, thus, survey the available survey data and issues regarding the measurement of macroeconomic expectations. Furthermore, we discuss the research frontier on important aspects of the expectations channel: We evaluate the evidence on whether expectations are formed consistently with standard macroeconomic relationships, discuss the insights with respect to the anchoring of inflation expectations, explore the role of narratives and preferences and lastly, we survey the research on causal effects of central bank communication on expectations and economic choices

Are survey expectations theory-consistent? The role of central bank communication and news

In this paper we analyze whether central bank communication can facilitate the understanding of key economic concepts. Using survey data for consumers and professionals, we calculate how many of them have expectations consistent with the Fisher Equation, the Taylor rule and the Phillips curve and test, by accounting for three different communication channels, whether central banks can influence those. A substantial share of participants has expectations consistent with the Fisher equation, followed by the Taylor rule and the Phillips curve. We show that having theory-consistent expectations is beneficial, as it improves the forecast accuracy. Furthermore, consistency is time varying. Exploring this time variation, we provide evidence that central bank communication as well as news on monetary policy can facilitate the understanding of those concepts and thereby improve the efficacy of monetary policy

The Implications of Central Bank Transparency for Uncertainty and Disagreement

Using survey data from 25 economies we provide evidence that greater transparency surrounding monetary policy reduces uncertainty of interest rates and inflation, primarily by reducing uncertainty that is common to agents rather than disagreement between agents. This suggests that studies that focus on disagreement as a proxy for uncertainty understate the benefits of monetary policy transparency. The adoption of inflation targets and forward guidance are both associated with lower uncertainty, although inflation targets have a stronger impact on reducing uncertainty than forward guidance. Moreover, there are diminishing benefits from ever higher levels of transparency. Taken as a whole, our results support the contention that clarity of communication is as important as the magnitude of transparency

Determinants of pollution: what do we really know?

The recent literature proposes many variables as significant determinants of pollution. This paper gives an overview of this literature and asks which of these factors have an empirically robust impact on water and air pollution. We apply Extreme Bound Analysis (EBA) on a panel of up to 120 countries covering the period 1960-2001. We find supportive evidence of the existence of the environmental Kuznets curve for water pollution. Furthermore, mainly variables capturing the economic structure of a country affect air and water pollutio

Imperfect Information and Consumer Inflation Expectations: Evidence from Microdata

AbstractThis paper explores which factors trigger an adjustment in consumers’ inflation expectations and looks at the implications regarding forecast errors. We find support for imperfect information models, as inflation volatility and news trigger an adjustment in expectations. Furthermore, we document that individual expectations become more accurate if they have been adjusted.</jats:p

Risk, Financial Stability and FDI

All Foreign Direct Investment (FDI) involves risk. Supplementing the IB literature, we assess the effects of financial system risk on FDI trends. Specifically, we propose a new theoretical paradigm combining institutional risk aversion and institutional affinity, suggesting MNE-generated FDI will be sensitive to sovereign and bank-related risks. Employing a large panel of bilateral FDI holdings from 112 origin countries in the Eurozone, results show that financial stability in origin and host countries, matters for FDI. Policymakers in countries seeking to attract FDI should be attentive to both domestic conditions and the financing environment that MNEs encounter in their home countries

Mindestkurs für den Schweizer Franken: Gefährlicher Interventionismus der SNB?

Die Schweiz ist in den vergangenen Monaten durch die drastische Aufwertung des Schweizer Franken gegenüber dem Euro unter Druck geraten. Im September 2011 verkündete deshalb die Schweizerische Nationalbank (SNB) einen Mindestkurs des Franken zum Euro. Mit einer Untergrenze von 1,20 Franken je Euro soll der nach Ansicht der SNB »massiven Überbewertung« der Währung entgegengewirkt werden. Oliver Landmann, Universität Freiburg, sieht diese Maßnahme vor dem Hintergrund, dass die Schweiz als kleine offene Volkswirtschaft auch als Nicht-Mitglied der Europäischen Union aufs Engste mit ihrem politischen und wirtschaftlichen Umland verbunden ist. Das bedeutet, dass das Land von allen positiven wie negativen Entwicklungen in der EU betroffen sein wird. Deshalb wäre es eine Illusion zu glauben, die Schwierigkeiten, in welche die Eurozone durch ihre aktuelle Krise geraten ist, könnten an der Schweiz vorbeigehen. Die Festlegung eines Mindestkurses von 1,20 Fr. ist zwar kein Wundermittel, aber eine »mit Bedacht ergriffene Maßnahme der Schadensminimierung«. Gunther Schnabl, Universität Leipzig, betont, dass die Schweiz mit dieser Entscheidung geldpolitischen Handlungsspielraum zurückgewinnt, da sie sich »von dem Fluch spekulativer Kapitalzuflüsse« teilweise befreien kann. Allerdings bleibe die Wechselkursbindung im derzeitigen Umfeld der globalen Liquiditätsschwemme sowie instabiler europäischer Staatshaushalte und Banken nur eine unbefriedigende Lösung. Denn bei festem Wechselkurs und steigender Inflation werden die immensen Euro-Reserven in der Schweizerischen Zentralbankbilanz langfristig real entwertet. Damit werde die Sozialisierung der Kosten der europäischen Staatsschulden- und Finanzkrisen auf die Schweiz ausgeweitet. David Iselin und Michael J. Lamla, KOF Konjunkturforschungsstelle der ETH Zürich, werten die Einführung der Wechselkursuntergrenze als Erfolg und das Risiko dieses Engagements der SNB als gering. Angesichts der erwarteten niedrigen Inflationsraten im nächstenSchweizer Franken, Wechselkurs, Wechselkurspolitik, Finanzmarktkrise, Eurozone, Interventionismus, Zentralbank, Schweiz

Central Bank Announcements: Big News for Little People?

Little is known on how and whether central bank announcements affect consumers' beliefs about policy relevant economic figures. This paper focuses on consumers' perceptions and expectations of inflation and interest rates and confidence therein. Based on a sound identification (running surveys shortly before and after communication events), and relying on above 15 000 observations, spanning over 12 FOMC press conferences between December 2015 and June 2018, we document the impact of the central bank communication on ordinary people. While announcement events have little measurable direct effect on average beliefs, they make people more likely to receive news about the central bank's policy. In general, informed consumers tend to have lower perceptions and expectations, higher confidence and, to an extent, better quality beliefs

Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication

Using the microdata of the Michigan Survey of Consumers, we evaluate whether U.S. consumers form macroeconomic expectations consistent with different economic concepts. We check whether their expectations are in line with the Phillips Curve, the Taylor Rule and the Income Fisher Equation. We observe that 50% of the surveyed population have expectations consistent with the Income Fisher equation and the Taylor Rule, while 25% are in line with the Phillips Curve. However, only 6% of consumers form theory-consistent expectations with respect to all three concepts. For the Taylor Rule and the Phillips curve we observe a strong cyclical pattern. For all three concepts we find significant dierences across demographic groups. Evaluating determinants of consistency, we provide evidence that the likelihood of having theory-consistent expectations with respect to the Phillips curve and the Taylor rule falls during recessions and with inflation higher than 2%. Moreover, consistency with respect to all three concepts is aected by changes in the communication policy of the Fed, where the strongest positive effect on consistency comes from the introduction of the official inflation target. Finally, we show that consumers with theory-consistent expectations have lower absolute inflation forecast errors and are closer to professionals' inflation forecasts