Acceso usuarios
Jim Granato, Melody Lo, M.C. Sunny Wong
This paper uses the empirical implications of theoretical models (EITM) framework to examine the consequences of the asymmetric diffusion of expectations. In the spirit of the traditional two-step flow model of communication, less-informed agents learn the expectations of more-informed agents. We find that when there is misinterpretation in the information acquisition process, a boomerang effect exists. In this equilibrium the less-informed agents’ forecasts confound those of more-informed agents. We apply the EITM approach to a key economic variable known to have a relation to economic fluctuations – inflation expectations. Using surveyed inflation expectations data for the period, 1978–2000, we find the boomerang effect exists. One implication of this finding pertains to economic policy and economic volatility: because policymakers have more information than the public, the boomerang effect can lead policymakers to make inaccurate forecasts of economic conditions and conduct erroneous policies which contribute to economic instability.
