23.01.2024: Oliver Pfäuti – The inflation attention threshold and inflation surges

Presenter: Oliver Pfäuti.
Affiliation: University of Texas at Austin, Department of Economics.

Paper: The Inflation Attention Threshold and Inflation Surges.

Date: January 23, 2024.
Time: 13:00 GMT (15:00 Israel Time)

Abstract: At the outbreak of the recent inflation surge, the public’s attention to inflation was low but increased rapidly once inflation started to rise. Using survey inflation expectations, I quantify when and by how much the public’s attention to inflation changes. I estimate an attention threshold at an inflation rate of 4%, and that attention doubles when inflation exceeds this threshold. Negative supply shocks are more than twice as inflationary in the high-attention regime, and the increase in people’s attention to inflation in early 2021 accounts for about 50% of the supply-driven inflation between 2021 and 2023. I develop a general equilibrium model accounting for the attention threshold and show that shocks that are usually short lived can lead to a persistent surge in inflation if they induce an increase in people’s attention. The attention threshold leads to an asymmetry in the dynamics of inflation as periods of high inflation become substantially more likely than periods of low inflation.

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