News-driven inflation expectations and information rigidities

Abstract

We investigate the role played by the media in the expectations formation process of households. Using a news-topic-based approach we show that news types the media choose to report on, e.g., (Internet) technology, health, and politics, are good predictors of households' stated inflation expectations. In turn, in a noisy information model setting, augmented with a simple media channel, we document that the underlying time series properties of relevant news topics explain the timevarying information rigidity among households. As such, we not only provide a novel estimate showing the degree to which information rigidities among households vary across time, but also provide, using a large news corpus and machine learning algorithms, robust and new evidence highlighting the role of the media for understanding inflation expectations and information rigidities.