I have devoted most of my career to studying inflation expectations. And my own thinking has shifted pretty dramatically in the past year or two. Good time for a thread?
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I started researching consumer inflation expectations in grad school in the 2010s because I felt like it would be really useful for monetary policymakers to better understand how the public forms expectations and how to use expectations as a policy tool (esp. at the ZLB).
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I wrote "Fed Speak on Main Street" and a series of other papers about how the Fed struggles to communicate with households and to shape their expectations. The goal was to understand how they could better communicate and better shape expectations.
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And in the course of a few years, the Fed and other CBs really ramped up their communication games-- Twitter, press conferences, cute videos, and the like. I was excited, if not fully optimistic. But now I am less so. The big takeaway of tons of research is that...
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... Most people don't want to pay attention to central bank communication, no matter how accessible, entertaining, or targeted. Central banks could respect this preference by doing their best to make sure people don't need to pay them much attention. But the more they try...
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... the more the whole purpose of their communication strategy is muddled. When Fed officials do manage to get the attention of the general public, the reaction is usually highly politicized. "No news is good news" should be the central bank motto. Newsworthy = politicized.
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But to use inflation expectations "as a policy tool," that is, for stabilization and fine tuning, being newsworthy is a must. This is a big problem. It is not feasible, and if it were feasible, it wouldn't necessarily be desirable.
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Moreover, there is relatively little evidence that manipulating inflation expectations can effectively shift consumption intertemporally. What about anchoring inflation expectations? Super important, but there are so many different definitions of "anchored" out there.
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When there are big, dramatic episodes like the Great Depression and recovery, the world wars, the Volcker disinflation, then inflation expectations (by any measure) and inflation strongly co-move and each affects the other. Over shorter periods, relationship is much weaker.
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And over shorter periods, it matters much more which measure of expectations you use-consumer surveys, professional forecasters, TIPS, etc. All of these measures have flaws, but they all rose in the 70s and fell with the Volcker disinflation.
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I generally agree with Rudd that there is too much emphasis on expectations as something the Fed can/should directly control or fine-tune. Focusing on price stability and full employment should keep expectations anchored enough.
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