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arXiv · 2105.05297

Inflation -- who cares? Monetary Policy in Times of Low Attention

Oliver Pfäuti
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Abstract

I propose an approach to quantify attention to inflation in the data and show that the decrease in the volatility and persistence of U.S. inflation after the Great Inflation period was accompanied by a decline in the public's attention to inflation. This decline in attention has important implications (positive and normative) for monetary policy as it renders managing inflation expectations more difficult and can lead to inflation-attention traps: prolonged periods of a binding lower bound and low inflation due to slowly-adjusting inflation expectations. As attention declines the optimal policy response is to increase the inflation target. Accounting for the lower bound fundamentally changes the normative implications of declining attention. While lower attention raises welfare absent the lower-bound constraint, it decreases welfare when accounting for the lower bound.

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Oliver Pfäuti. 2021-05-11. Inflation -- who cares? Monetary Policy in Times of Low Attention. https://arxiv.org/abs/2105.05297

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