News-driven inflation expectations and information rigidities

In the new CAMP working paper 03/2019, Larsen, Thorsrud and Zhulanova investigate the role played by the media in the expectations formation process of households. Building on a theoretical noisy information model, augmented with a simple media channel, they first document that the degree of information rigidity among households varies significantly across time. In turn, using a news-topic-based approach and machine learning algorithms, they show that the news types the media choose to report on are good predictors of households’ stated inflation expectations and that the underlying time series properties of relevant news topics explain the time-varying information rigidity among households.

The paper contributes to a growing literature emphasizing the ability of (financial) news to predict the economic developments and the role of media as information intermediaries in economics.  The Financial News Index (FNI), constructed at CAMP, is one practical output of such research. Read more about the index on our website or in the blog archive.

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