The role of media for consumers’ inflation expectation formation

Abstract

This paper analyzes the impact of the media on consumers' inflation expectations.We distinguish two channels through which media can influence expectations. First, the intensity of coverage of inflation reports plays a role (volume channel). Second, the contents of these reports matter (tone channel). Employing a unique data set capturing media reports on inflation in Germany comprising 01/1998-09/2007 we are able to discriminate between these two effects. We find that the volume effect generally improves the accuracy of consumer forecasts while the tone channel induces a media bias. JEL classification: E52; D83

News on Inflation and the Epidemiology of Inflation Expectations

“…Thus, we cannot appreciate a negative impact of news on the expectation gap even when consumers' overall perception is more pessimistic and their forecasts should reflect higher accuracy and/or attentiveness to economic reporting. Also Lamla and Lein () report similar evidence based on German data on inflation expectations, while Dräger () obtains analogous results in the analysis of both expected and perceived inflation in Sweden. These facts certainly deserve to be examined in further detail.…”

“…According to Hamilton () and Soroka (), a common finding in literature on news coverage is that there is more reporting of bad news than good news. To explain this evidence, Lamla and Lein () suggest that newspapers may have an incentive to favor bad news over good news, so as to catch more attention from the readers and increase their sales.…”

News on inflation and the epidemiology of inflation expectations in China

“…It may also be meaningful to consider the possible impact of news of neutral tone on individuals' expectations as in Lamla and Lein (2014).…”

Central Banks Inflation Forecast and Expectations. A Comparative Analysis

“…Carroll's epidemiological expectations theory is supported (or partially supported) by the empirical findings for the USA (Pfajfar, 2013), Germany (Lamla, 2012) and for China (Lei, 2015). Other studies search for possible enlargement of original Carroll's findings and examine whether the volume and content of the media signal may affect consumers forecast accuracy (Lama, 2014).…”