Results

In order to establish how news reporting transmits monetary policy to households, I proceed in two steps. First, I show that a tightening monetary policy surprise increases the amount of reporting referring to high or increasing inflation. In a second step, I analyze how monetary policy and news reporting jointly affect inflation expectations.

Table 2.7 shows how monetary policy surprises affect newspaper reporting. I obtain the results by simply regressing the different measures of news reporting for articles published after a FOMC meeting on the high-frequency identified monetary policy surprises of the respective meeting.²⁹ The effect is only significant for the measures of reporting about high or increasing inflation (‘up’ measure). The coefficient is positive, both for the sentence-based and the article-based measure. This result is in line with the hypothesis that after tightening surprises reporting about high inflation increases.

29The regression model is a simple OLS model with robust standard errors.

CHAPTER 2. MONETARYPOLICY AND HOUSEHOLDEXPECTATIONS 74

However, the effect is insignificant for the measures of ‘down’ sentences as well as the difference measures. This indicates possible problems with the relatively simple text analysis methodology. A more complex approach such as proposed by Shapiro et al. (2019) or Picault and Renault (2017) may provide results that are more precise.

However, this is beyond the scope of this chapter.

To support the results found, I also rely on the self-reported news from the Michi-gan Survey. The advantage of this measure is that we can be sure households actually heard the news. The drawback is the relatively low coverage. As already discussed above, only two news items are recorded per household, limiting the total number of specific news items reported. Nevertheless, Table B.5 in Appendix B1 shows that tight-ening surprises increase the probability of households hearing news about increasing inflation and higher interest rates.³⁰ These results are in line with the effect on actual reporting.

Finally, I want to understand how reporting affects inflation expectations and how much of the overall effect of monetary policy is due to reporting. For this purpose, I resort to a simple form of mediation analysis as used in Das et al. (2020). This simple approach relies on jointly estimating the effect of the explanatory variables (monetary policy in this case) and the mediator (news reporting). I therefore estimate the model from equation (2.1) again, but now also include the different measures of newspaper reporting. The timing is the same as before. I include the reporting associated with the monetary policy surprise from the previous month. The sample is the same as the baseline sample in Table 2.2.

Table 2.8 displays the results. In columns (1) and (3), I jointly include the two ‘up’

and ‘down’ measures due to the overlap between ‘up’ and ‘down’ articles for some meetings. As expected, more reporting about high or increasing inflation increases inflation expectations while reporting about low or decreasing inflation significantly lowers expectations. Interestingly, the effect of reporting about low inflation is almost twice as large as the effect of reporting about more inflation. This may be related to the fact that reporting about low inflation is more infrequent so it might be more noticeable when it does occur. The effects are independent of the measure used. The quantitative difference between the coefficients is related to the different quantitative levels of the two measures. Finally, the difference measures both increase inflation expectations, which is no surprise given the effects of the two separate measures.³¹

Based on these results one can discuss the direct and indirect effects of monetary

30The dependent variables are dummies whether the household heard something about higher prices/increasing inflation vs. lower prices/decreasing inflation and higher interest rates vs. lower interest rates respectively. Details on these questions can be found in Appendix B2.

31For completeness, Table B.6 in the appendix provides similar results using the self-reported news again. The direction of the effects is in line with results found for actual reporting.

Table 2.8: Expectations, monetary policy and newspaper reporting Dependent variable: inflation expectations int Sentence-based measure Article-based measure

(1) (2) (3) (4)

‘up’/‘down’ diff. ‘up’/‘down’ diff.

FF surprise,t-1 0.84* 0.95* 1.14** 1.22**

(0.51) (0.50) (0.51) (0.50)

Share of ‘up’ sentences,t-1 4.04***

(1.06) Share of ‘down’ sentences,t-1 -7.07***

(1.14)

Diff. in sentences shares,t-1 5.37***

(0.87)

Share of ‘up’ articles,t-1 0.28***

(0.07)

Share of ‘down’ articles,t-1 -0.50***

(0.07)

Diff. in articles shares,t-1 0.38***

(0.06) Gas price inflation,t 0.04*** 0.04*** 0.04*** 0.04***

(0.00) (0.00) (0.00) (0.00)

Food price inflation,t 0.63*** 0.62*** 0.64*** 0.62***

(0.06) (0.06) (0.06) (0.06)

Observations 86988 86988 86988 86988

Households 43494 43494 43494 43494

Within R² 0.01 0.01 0.01 0.01

Notes: FF surprise: surprise change in the 3-month federal funds future around FOMC meetings. Inflation expectations are from the Michigan Survey of Consumers, and refer to the next 12 months. Realized inflation is measured as the month-on-month change in the price level for food and gasoline products, respectively. ‘up’ means sentence/article refers to high or increasing inflation. ‘down’ means sentence/article refers to low or decreasing inflation. Cluster-adjusted robust standard errors in parentheses. *p<0.1, **p <0.05, ***

p<0.01.

policy. When including the sentence-based measures, the direct effect of monetary pol-icy is somewhat smaller than without news reporting (0.84 and 0.95 compared to 1.00 in Table 2.2). When including the article-based measure, the effect actually increases slightly. The indirect effect of monetary policy on expectations can be computed by combining the effect of monetary policy on reporting from Table 2.7 with the effect of reporting on expectations in Table 2.8. For the case of the share of ‘up’ sentences, the in-direct effect of monetary policy on inflation expectations is 0.027·4.04 =0.11, i.e. 11%

of the total effect in the baseline specification. Using the article-based ‘up’ measure it is: 0.356·0.28 =0.10 or 10% of the total effect.

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Quantitatively the news reporting measures thus explain only a small share of the overall effect of monetary policy. This may be due to several reasons. We have already seen above that the measures derived here may be imprecise. In addition, the news-paper coverage is limited and does not include all major (regional) US newsnews-papers.

Finally, households also depend on other media such as TV and radio for informa-tion on expectainforma-tions (D’Acunto et al. 2019b). Therefore, the derived measures of news reporting may not fully cover all the news households are exposed to. A more compre-hensive analysis of all types of reporting with a more complex text analysis approach may lead to quantitatively more relevant and more precise results.

Generally, however the results support the hypothesis that surprise tightening an-nouncements increase inflation expectations due to the information effect. After sur-prise tightenings, newspapers report more about high or increasing inflation, which in turn influences household inflation expectations. They thereby provide a potential transmission channel from the central bank to the households.