Browsing by Subject "Data-Dependence"

After decades of low inflation in developed economies, inflation increased significantly beginning from 2021, as consequences of global pandemic, supply chain disruptions, and later a war in Europe led to upward price pressures on several parts of the economy. As inflation proved to be more persistent than initially expected, central banks were forced to act in order to protect price stability. This thesis is an explanatory study that conceptualizes inflation narrative dynamic from the perspective of central banks. I argue that inflation is not based on scarcity alone, but also a self-enforcing narrative, which can make inflation persistent even when underlying inflationary pressures are solved. Inflation expectations are manifestations of narratives that are replicated over time with limited information in recursive feedback loop rather than being rationally formed under full information as many economic theories assume. I present a framework to study the formation of inflation narratives and a brief history of inflation theories to put current theoretical understanding of inflation in its historical context. I study what dominant inflation narratives and underlying economic theories can be identified in central bank communications during 2021-2022 and how central banks have aimed to influence inflation expectations of the public. Major change in monetary policy communication during the research period was the shift from Forward Guidance communication policy to data-dependence. In Forward Guidance, central banks assume that they are able to steer and anchor inflation expectations of the public by committing themselves to future interest rate path in advance. As inflation continued to increase throughout the research period, central banks could no longer credibly anchor public inflation expectations through Forward Guidance and had to become more data-dependent. Instead of anchoring expectations, central banks now have to adapt their inflation narrative and steer inflation expectations as new data emerges in backward-looking manner.