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Firms' Inflation Expectations under Rational Inattention and Sticky Information: An Analysis with a Small-Scale Macroeconomic Model

Author

Listed:
  • Tomiyuki Kitamura

    (Bank of Japan)

  • Masaki Tanaka

    (Bank of Japan)

Abstract

In this paper, we construct a small-scale macroeconomic model that incorporates three hypotheses on the formation of inflation expectations: the full-information rational expectations (FIRE), rational inattention, and sticky information hypotheses. Using data for Japan, including survey data on firms' inflation expectations, we estimate the model to examine the empirical validity of each hypothesis, and analyze how rational inattention and sticky information affect the dynamics of firms' inflation expectations. Our main findings are twofold. First, each one of the three hypotheses has a role to play in explaining the mechanism of the formation of firms' inflation expectations in Japan. In this sense, the manner in which firms form their inflation expectations in Japan is complex. Second, although firms' inflation expectations have been pushed up by the Bank of Japan's introduction of its "price stability target" and the expansion in the output gap amid the Bank's Quantitative and Qualitative Monetary Easing (QQE), the presence of rational inattention and information stickiness has slowed the pace of the rise in firms' inflation expectations.

Suggested Citation

  • Tomiyuki Kitamura & Masaki Tanaka, 2019. "Firms' Inflation Expectations under Rational Inattention and Sticky Information: An Analysis with a Small-Scale Macroeconomic Model," Bank of Japan Working Paper Series 19-E-16, Bank of Japan.
    • Handle: RePEc:boj:bojwps:wp19e16
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    References listed on IDEAS

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    Cited by:

    1. Shuichiro Ikeda & Haruhiko Inatsugu & Yui Kishaba & Takuji Kondo & Kenichi Sakura & Kosuke Takatomi & Takashi Nakazawa & Kotone Yamada, "undated". "Inflation in Japan: Changes during the Pandemic and Issues for the Future," Bank of Japan Working Paper Series 22-E-18, Bank of Japan.
    2. Haruhiko Inatsugu & Tomiyuki Kitamura & Taichi Matsuda, 2019. "The Formation of Firms' Inflation Expectations: A Survey Data Analysis," Bank of Japan Working Paper Series 19-E-15, Bank of Japan.
    3. Jouchi Nakajima & Hiroaki Yamagata & Tatsushi Okuda & Shinnosuke Katsuki & Takeshi Shinohara, 2021. "Extracting Firms' Short-Term Inflation Expectations from the Economy Watchers Survey Using Text Analysis," Bank of Japan Working Paper Series 21-E-12, Bank of Japan.
    4. Vereda, Luciano & Savignon, João & Gouveia da Silva, Tarciso, 2021. "A new method to assess the degree of information rigidity using fixed-event forecasts," International Journal of Forecasting, Elsevier, vol. 37(4), pages 1576-1589.

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    More about this item

    Keywords

    Survey inflation expectations; Rational inattention; Sticky information;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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