Dr Alistair Macaulay

Using a novel decomposition, I show that systematic relationships between information and subjective models across agents distort the aggregate transmission of shocks in a general class of macroeconomic models. I document evidence of such a systematic correlation between household information and subjective models around inflation using unique features of the Bank of England Inflation Attitudes Survey: on average, households with more negative beliefs about the impacts of inflation obtain more information about inflation. A model in which acquiring information about inflation is costly, and observed information affects the perceived relationship of inflation and real incomes, can explain the empirical variation in information and subjective models in the cross-section and over time. The model generates time-varying shock transmission, and a selection effect that weakens the role of information frictions in aggregate dynamics. Through a novel channel, transitory spikes in inflation may become 'baked in' to inflation expectations, but only among those with the most positive subjective models of the effects of inflation.

Using survey data from Germany, we study heterogeneity in how households form inflation expectations. We elicit (i) uncertainty in perceptions of current inflation, and (ii) how persistent households perceive inflation to be. Combining these with standard survey questions on inflation, we infer laws of motion for expectations at the individual level. Based on averages alone, a standard model calibrated to our data predicts inflation shocks generate small and transitory responses in expectations and consumption. The considerable heterogeneity we observe in expectation formation, however, amplifies the transmission to aggregate consumption by an order of magnitude, and substantially increases its persistence. This amplification enables the model to match the large consumption effects of the temporary VAT cut in Germany in 2020.

We study the relationship between media portrayals of inflation and consumer sentiment. Using tools from natural language processing, we uncover two competing narratives in US news coverage of inflation: the first relates inflation to financial variables, while the second relates inflation to real variables. As inflation rose in 2021, media increasingly emphasized the real economy. Linking inflation news to social network data from Twitter, we find that exposure to articles emphasizing the connection between inflation and the real economy significantly reduces sentiment, particularly in periods of high inflation. Shifting media narratives may therefore have contributed to declining consumer sentiment in 2021.

I show that if it is costly for households to process information about asset returns, a model with ex-ante identical households features persistent inequality. The steady state has a two-agent structure, with inequality maintained by a complementarity between attention and wealth: wealthy households have stronger incentives to pay attention to asset choices, and so earn higher returns than asset-poor households. Fiscal expansions are less powerful in this model than in a standard model with heterogeneous discount factors, because when an expansion causes poor households to start saving, they also increase their attention. They therefore earn higher interest rates, and so save even more, smoothing the windfall from the policy over a longer time period. I provide evidence for this increase in attention using cross-state variation in uncertainty about savings interest rates in the aftermath of the 2017 Tax Cuts and Jobs Act in the US. The effects of fiscal policy therefore depend not just on the existence of inequality, but also on the cause of that inequality. (c) 2021 Elsevier B.V. All rights reserved.

We show that introducing rational inattention into a model with uninsurable unemployment risk can generate multiple steady states, when the model with full information has a unique steady state. The model features persistent, heterogeneous labour market expectations, consistent with survey evidence. In a heterogeneous agent New Keynesian model, rational inattention to the future hiring rate generates three steady states: an unemployment trap with mild deflation and a low (but positive) job hiring rate, a middle steady state with moderate employment and inflation, and an ‘employment trap’ with high employment and inflation. Large mutations in the distribution of household beliefs can shift the economy between steady states.

In this paper we explore both theoretical and empirical evidence on communication with the general public. The model provides guidance for policymakers by highlighting some potentially important risks in communicating simply with a broader audience. In particular, in a model where trust and engagement are low, there are benefits to engaging a wider audience. But doing so risks ultimately lowering welfare unless guided by the 3 E’s of public communication: Explanation, Engagement and Education. Central banks have made great strides in all three, but numerous challenges remain.