The paper presented in this Mannheim Applied Seminar provides evidence on narratives about the macroeconomy – stories individuals tell to make sense of economic phenomena – in the context of a historically notable rise in inflation. In surveys with experts and US households, the authors measure narratives in open-ended text responses and quantitatively represent them as Directed Acyclical Graphs (DAGs). They document three main findings. First, narratives about the drivers of higher inflation rates are heterogeneous and differ fundamentally between experts and households. Compared to experts' narratives, households' narratives are more fragmented, focus less on the demand side, and are more likely to feature ideologically loaded explanations, such as government mismanagement or price gouging. Second, households' narratives are predictive of their inflation expectations, and shifting the narratives that are on top of households' minds causally changes inflation expectations. Finally, in an experiment giving households incentives to search for and read news articles about inflation, the authors show that exposure to mass media seems to be a key source of heterogeneity in narratives. The findings showcase the features of economic narratives and their consequences for expectation formation.
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11.05.2022 | 12:15 - 13:30 (CET)
ZEW – Leibniz-Zentrum für Europäische Wirtschaftsforschung
L 7, 1 68161 Mannheim