Agenda Setting and Economics

1. Media and Inflation Nowadays, central banks often emphasize that managing consumers' inflation expectations has become one of their most important tasks. However, given the prominent role inflation expectations play for monetary policy, still surprisingly little is known about the way consumers form their expectations. This project attempts to shed some light on the black box of consumers' inflation perception and expectation formation by investigating the role of the media as transmitters and filter of news. Carroll (2003) finds that more frequent media reporting makes consumers' expectations more accurate as it triggers an updating of their beliefs. Therefore, the more the media report on inflation, the more likely it is that consumers read these reports and update their beliefs with the new information. Carroll assumes that the media transmit rational inflation forecasts. The latter assumption may be precarious. This paper argues that it is essential not only to focus on how often media report on inflation, but also to take into account what is reported. Media reports often discuss whether inflation is or will be rising or falling, and the views expressed therein are not necessarily a rational forecast. Hence, some media reports may be biased. Thus, people consuming a report utilize the potentially biased information provided in the article to update their beliefs. Therefore, it is necessary to distinguish the two channels on how media reports may affect consumers' inflation expectations. First, in line with Carroll (2003), the intensity of reporting about inflation matters. This is incorporated in our volume channel. If newspapers and TV broadcasts deliver more reports on inflation, the likelihood that consumers obtain new information on inflation developments increases. As a consequence this implies that consumers' forecast accuracy improves with higher media coverage. Second, the tone channel captures the content of news reports. The tone of news gives consumers signals in which direction to revise their expectations. Thus, if the media transmit rational forecasts, the tone channel should improve the forecast of consumers. Notably there are good reasons to believe that media do not submit the best possible forecast but slant the information. Hence, the tone channel can also deteriorate the forecast accuracy if the media report is biased. Agenda Setting and Economics

2. “Teuro” and Inflation Perceptions: The introduction of euro coins in January 2002 led to a surprisingly large upwards shift in inflation perceptions in several euro area countries. Unlike in the historical data, where inflation perceptions relatively closely tracked official inflation rates, this was not the case during the year 2002. Quantified figures of inflation perceptions for Germany rose from 3.4 percent in January to 6.1 percent in May 2002. At the same time, official inflation rates fell from 2.2 to 1.1 percent. And while economists were worried about a deflationary period, consumers' inflation perceptions remained at very high levels at least until the end of 2003. Despite several attempts to explain this large gap between inflation perceptions and official inflation rates, there is still no sufficient explanation for it. We argue that media might play an important role in that respect as people obtain their information on current economic conditions mainly through the media, especially TVs and newspapers. The figure below shows the stark correlation between the EU balance inflation perceptions and the amount of articles in the printed press using the wording “Teuro”. Agenda Setting and Economics

3. Media and Inflation Overall media reports capture inflation dynamics correctly. However, changes in inflation dynamics are not always followed by the same change of either volume or tone of reporting. Agenda Setting and Economics

4. Results Econometric Analysis: Media drives inflation perceptions and inflation expectations. Evidence exits that both Tone and Volume matter. Volume: Increases the likelihood of updating on inflation dynamics and thereby improves the accuracy of consumers. Tone: May impair the accuracy of inflation expectations of consumers. E.g. Teuro debate. Further Results: -News on rising inflation especially deteriorates beliefs. -Similarly, a bad assessment deteriorates beliefs. -Newspaper articles contribute to the precision of the consumers' inflation expectations -Media information might even outperform real economic figures in terms of explanatory power. Reference: Michael J. Lamla and Sarah M. Lein “The Role of Media for Consumers' Inflation Expectation Formation”, Working papers 08-201, KOF Swiss Economic Institute, ETH Zurich. Michael J. Lamla and Sarah M. Lein “The Euro Cash Changeover, Inflation Perceptions and the Media”, mimeo Agenda Setting and Economics