Raphael Schoenle, Brandeis University

"The Expectations of Others"

Abstract

How do social networks affect inflation expectations? In a model of memory and recall, we analytically show conditions under which social networks amplify inflation expectations as well as necessary conditions for belief stability. In particular, sharing salient experiences or sharing experiences among similar individuals can intensify amplification. Using a novel dataset that integrates information on inflation expectations with social network connections, our empirical analysis reveals several key findings in line with the model predictions: Inflation expectations within one's social network are positively associated with individual inflation expectations. This relationship is stronger for groups that share common demographic characteristics such as gender, income, or political affiliation. An instrumental variable approach further establishes causality of these results while also showing that salient information disseminates strongly through the network. Our estimates imply that the influence of the social network amplifies but does not destabilize inflation expectations.

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Contact person: Jeppe Druedahl