Subjective Inflation Expectations and Monetary Policy Communication: The Role of Medium, Messenger, and Message

Inflation expectations of households and firms are central determinants in all dynamic macro models. Yet, empirical evidence suggests these decision makers form expectations in ways that deviate from the assumptions in these models: on average, inflation expectations are biased upwards relative to ex-post realizations, are substantially dispersed across individuals, and co-move strongly with the prices of selected goods such as milk or gas. In this policy note, I discuss several stylized facts on subjective inflation expectations, their determinants, and how inflation expectations shape individuals’ consumption, savings, and investment decisions. Finally, I review the recent literature on how central banks should communicate with the general public and highlight the role of the policy message, the messenger, and the medium for the effectiveness of central bank communication.