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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.
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.
The Euro and Prices
"The purpose of the study is to examine the effects of the 'euro cash changeover' on consumer prices in the euro area. The report begins by describing price developments at the time of the introduction of euro notes and coins. The study also investigates the impact of price developments at the euro changeover on different households by socio-economic group. The third part of the report focuses on inflation perceptions and a fourth section explores the cross-border convergence of prices since the euro changeover. The following findings can be highlighted: (1) it appears that aggregate inflation rates were largely unaffected by the introduction of the euro; (2) overall, differences in inflation rates across different types of households are small; (3) inflation perceptions are mainly driven by lagged perceptions, inflation expectations and actual inflation while different individual inflation experiences also help to explain the 'jumps' in perception data; (4) price differentials have generally declined over time across European countries though there is no sizeable euro introduction convergence effect."--Publication information page.
Writing Clearly
The paper presents a methodology for measuring the clarity of central bank communication, illustrating it with the case of the European Central Bank (ECB) in 1999-2007. The analysis identifies the ECB's written communication as clear about 95 percent of instances, which is comparable to, or even better than, other central banks for which a similar analysis is available. We also find that the additional information contained in the ECB's Monthly Bulletins helps to improve communication clarity compared to ECB's press releases. In particular, the Bulletins contain useful clarifying information on individual inflation factors and the overall forecast risk; in contrast, the bulletin's communication on monetary shocks has a negative, albeit small, impact on clarity.
The Hidden Heterogeneity of Inflation and Interest Rate Expectations
Using a new consumer survey dataset, we show that macroeconomic preferences affect expectations and economic decisions through different channels. While household expectations are on average inversely related to preferences, households with the same inflation or interest rate expectations can differently assess whether the level of the corresponding variable is appropriate or too high/too low. This "hidden heterogeneity" in expectations is correlated with sociodemographic characteristics and affects durable spending and saving decisions. We also show that the variation in inflation preferences can be explained with risk preferences. Overall, this adds a new dimension to the definition of anchored expectations.
