Date published: Jun 2021
SUERF Policy Brief, No 108
by Alexander Jung (European Central Bank) and
Patrick Kuehl (Association for Financial Markets in Europe)1
The views expressed by the authors are their own and do not necessarily reflect those of the Eurosystem or the Association for Financial Markets in Europe or its members. The authors remain responsible for any errors or omissions.
Download: SUERF Policy Brief, No 108 (0.36 MB)
Information demand drives inflation expectations
Taking a demand perspective, we analyse whether visitors’ activity on the ECB’s website influences private forecasts of future inflation and whether it reduces the gap between market forecasts and professional forecasters. Because previous studies on media attention measure the information supply derived from newspapers or TV, they only allow inference about whether agents were actively looking for the respective information, if information demand and supply are equal. Our approach based on search volumes of visitors is more targeted than supply-based approaches, since the proxy for information on demand captures the deliberate decision of agents to obtain more (or less) information on the ECB’s monetary policy.
There is a gap between experts’ inflation forecasts and inflation expectations by private agents (Figure 2). This study shows that website attention, as captured by visitor activity, influences euro area inflation expecta-tions. In a first step, we show that the public’s information demand for monetary news is driven by the (absolute) size of the ECB’s monetary policy shock and that it is also sensitive to different degrees of uncertainty and the complexity linked to non-standard monetary policy measures. In a second step, we show how these factors influence euro area inflation expectations.
Figure 2: Gap measures of euro area inflation expectations (percentages per annum)
Source: ECB, Thomson Reuters.
Notes: We show monthly observations. Gap_short (Gap_long) is the squared deviation between ILS1y1y (ILS5y5y) and the 5-year ahead inflation forecast from SPF (survey of professional forecasters).
In terms of methodology, a high frequency identification (HFI) is at the core of the econometric analysis. It explains (daily) movements in search activity on press conference days by coinciding (high-frequency) monetary policy shocks and controls. The HFI method has received particular attention in studies using financial asset prices that aim at disentangling the causal impact of monetary policy communication on financial asset prices.
Based on these regressions, we find that increased website attention contributes to narrowing the gap between market-based forecasts and (the mean of) longer-term professional inflation expectations. Our findings add to the theoretical evidence on the existence of an information and news channel.
Because of a tight two-way relationship between central banks and financial markets, there is a central role of financial market expectations in the conduct of monetary policy. For this reason, a central bank may not aim to directly reach all private actors, but its website-based communication can increase the awareness of consumers about central bank announcements. In this respect, both the website and the media are important transmission channels between the central bank and the public. In line with the predictions from theoretical communication models, this study shows that website attention, as captured by visitor activity, influences euro area inflation expectations and helps to close the gap between market-based inflation forecasts and longer-term professional expectations.
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About the authors
Alexander Jung is a Principal Economist and works in the Directorate General Monetary Policy of the European Central Bank. Before joining the ECB in 1999, he worked as Economist at the European Monetary Institute and the Deutsche Bundesbank. His research interests cover a wide range of topics in monetary economics and macroeconomics with a particular focus on monetary policy decision-making and communication. He holds a PhD in economics from the University of St. Gallen.
Patrick Kühl worked at the Association for Financial Markets in Europe and the European Central Bank. He holds a Diploma in political science from the University of Frankfurt and a Doctorate in sociology from the University of Mainz.
SUERF Policy Briefs (SPBs) serve to promote SUERF Members’ economic views and research findings as well as economic policy-oriented analyses. They address topical issues and propose solutions to current economic and financial challenges. SPBs serve to increase the international visibility of SUERF Members’ analyses and research. The views expressed are those of the author(s) and not necessarily those of the institution(s) the author(s).
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