Abstract
This paper investigates how inflation expectations of individuals are formed in India. We investigate if the news on inflation plays a role in the formation of inflation expectations following the epidemiology-based work by Carroll (Q J Econ 118(1):269–298, 2003). The standard literature on this topic considers news coverage by the print and audio-visual media as the sources of formation of inflation expectations. Instead, we consider the Internet as a potential common source of information based on which agents form their expectations about future inflation. Based on data extracted from Google Trends, our results indicate that during the period 2006–2018, the Internet has indeed been a common source of information based on which agents have formed their expectations about future inflation, and the Internet search sentiment has had some impact on inflation expectations. Additionally, based on the inflation expectations series derived from the Google Trends data, we find that there is presence of “information stickiness” in the system since only a small fraction of the population update their inflation expectations each period.
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Notes
https://www.statista.com/statistics/262966/number-of-internet-users-in-selected-countries/. Accessed on April 21, 2018.
https://www.livemint.com/Opinion/qHS04i31OfR8B4vskHVesJ/RBI-enters-the-exciting-new-world-of-Big-Data-analytics.html. Accessed on April 27, 2018.
It is to be noted that when we say that agents draw information from a common source like the Internet, it is not implied that people who have been surveyed about their inflation expectations have necessarily searched the Internet. In other words, there is no one-to-one correspondence between the response of the surveyed individuals and the individuals who searched the Internet. This is akin to the assumption in the standard epidemiology literature based on newspapers as a common source, where it is not the case that people who are surveyed about their inflation expectations have necessarily read the newspaper to derive information. We assume, like the newspaper is a source, the Internet is also a source of information and to show that the Internet is indeed a source based on which people form their expectations, we use the search statistic data provided by the Google Trends. Search statistics imply that people indeed have been using the Internet.
\( \beta = \gamma *\alpha_{1} \) and \( \mu_{t} = \varepsilon_{t} + \gamma \eta_{t} . \)
Results available upon request.
Results available upon request.
Here, we assume that in time period t, when agents are forming expectations about next period’s inflation, they do not have information on current period’s official inflation since it is published with a time lag. On the other hand, Google Trends is real-time data, and hence it is present in the current information set.
Results available upon request.
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Saakshi, Sahu, S. & Chattopadhyay, S. Epidemiology of inflation expectations and internet search: an analysis for India. J Econ Interact Coord 15, 649–671 (2020). https://doi.org/10.1007/s11403-019-00255-4
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DOI: https://doi.org/10.1007/s11403-019-00255-4