Central Bank Announcements and Inflation Expectations
Chapter 5 tests the main mechanism that central bank communication changes households’ inflation expectations. The chapter reports evidence from a survey experiment conducted on a sample of German households. It shows that households that receive more precise central bank information react more to central bank news than those who receive more vague information. Estimating the average treatment effect across the two experimental groups, the result is that more precise information attenuates both short-term (one-year-ahead) and medium-term (five-years-ahead) inflation forecasts but not longer-term expectations (ten years ahead). Other findings are that while younger people, women, and those less educated and financially literate have higher prior inflation expectations than their older, male, and financially literate counterparts, the evidence suggests that information rather than socioeconomic or demographic features matters most of all.