Dr. Rodrigo Lluberas, a researcher, professor of macroeconomics, and associate academic coordinator of ORT’s Bachelor’s Degree in Economics, participated in a study that is essential for understanding not only the impact of monetary policy but also the communication strategies employed by a country’s central bank, depending on whether that country has high or low inflation.
This paper, titled “Tell Me Something I Don’t Already Know: Learning in Low and High-Inflation Settings,” also has from researchers at the University of Chicago; the University of California, Berkeley; the Bank of Italy; the University of Montevideo; the Reserve Bank of Atlanta; Auckland University of Technology; the European Central Bank; the University of Texas; and the Central Bank of Uruguay.
In the following interview, Lluberas explains the key points for understanding the main findings of this research.
What does this study aim to show?
We show that the state of the economy—whether inflation is high or low—affects how economic agents learn from new information about inflation and how that shapes their expectations of future inflation.
What are the main findings?
The results suggest that households and firms in advanced economies, where inflation has recently risen, have become more alert and informed about the widespread and sustained increase in the prices of goods and services.
This results in a weaker reaction to information provided to them about inflation and monetary policy.
On the other hand, our findings confirm that the focus on inflation does not change in countries where inflation has been consistently high (such as Uruguay) or low (such as New Zealand).
These results are consistent with models in which agents' attention to information on economic variables—such as inflation—depends on the economic situation.
The findings of this study show that monetary policy and its communication have a different impact depending on whether countries have high or low inflation.
How was this research conducted? And, specifically, what are randomized controlled trials?
The study was conducted by different teams in various countries, and their results were then compiled.
RCTs, or randomized controlled trials, are experiments conducted in fields such as medicine. In other words, if a researcher is interested in confirming the effectiveness of a medical treatment for curing a disease, they select two groups of patients: one group receives the treatment, and the other—which is similar and serves as a control—does not. Patients are assigned to either the treatment group or the control group at random, hence the name “randomized.”
What we do is somewhat similar. On the one hand, we take a random sample of firms or households and provide them with information about past inflation or the central bank’s inflation target; another group of firms or households serves as a control group.
If there is any difference in inflation expectations between the two groups, it is because one group received information and the other did not.
What does it mean when individuals or companies that typically pay little attention to inflation suddenly develop high expectations when new information on the subject becomes available?
The study suggests that the economic climate influences the degree to which people pay attention to economic variables.
If inflation is high, it generally has a greater impact on my investment, spending, and saving decisions, so I take the time to learn more about it.
The opposite is true when inflation is low, because I don't spend as much time keeping up with it, since it's not a factor that will significantly influence my decisions.
Why does the main focus on inflationary issues come from stakeholders in the United States or the Eurozone, when Uruguay’s inflation rate—while it has always remained high—has been fluctuating?
The United States and the Eurozone are useful examples because they are countries/regions that have recently experienced periods of both low and high inflation. This allows us to see that, within a given country or region, changes in inflation affect how economic agents respond.
Uruguay serves as a case in point as a country with consistently high inflation, where providing information to market participants does not change their expectations, because they are already well-informed.
The opposite is true of New Zealand, where inflation has hovered around 2% over the past 30 years.
Are there any upcoming studies in the works that will build on this?
At the moment, we are working hard to improve this paper so that it can be published in a journal.
We are collaborating with some of the co-authors of this paper on projects that utilize the experiments conducted in Uruguay.
Is there interest in learning how policymakers can communicate with individuals and businesses in places where inflation is not a major concern, or what kind of information they should convey in places where people are already better informed?
That is crucial, especially in countries like Uruguay, where inflation has historically been high. As part of its monetary policy efforts, the central bank has a fundamental responsibility to communicate effectively.
As market participants begin to believe the central bank’s assurance that it will meet its goal of keeping inflation within the target range, expectations are likely to converge toward that range, and the cost of bringing inflation down will be lower.