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Consumers' Price Beliefs, Central Bank Communication, and Inflation Dynamics

September 20, 2019
Kosuke Aoki*1
Hibiki Ichiue*2
Tatsushi Okuda*3


Many developed economies in recent years have been characterized by a tight labor market and a low inflation environment, a phenomenon referred to as "missing inflation." To explain this phenomenon, we develop a dispersed information model in which consumers' search for cheaper prices affects firms' pricing behavior. The model shows that firms are reluctant to pass through cost increases because they fear a disproportionate decline in their sales. A history of low and stable inflation amplifies this effect by decreasing consumers' inflation beliefs. In this case, enhancement of the central bank's communication regarding its inflation target more firmly anchors consumers' inflation beliefs and makes the Phillips curve flatter, while enhancement of the central bank's communication about the current aggregate price level has the opposite effect.

JEL Classification
D82, E31, E58

missing inflation, imperfect information, price search, communication

The authors thank Naohisa Hirakata, Ryo Jinnai, Takushi Kurozumi, Kohei Maehashi, Ryuzo Miyao, Ichiro Muto, Teppei Nagano, Toshitaka Sekine, Tomohiro Sugo, Takashi Ui, Yosuke Uno, participants of the Eighth Joint Conference Organized by the University of Tokyo Center for Advanced Research in Finance and the Bank of Japan Research and Statistics Department, the CEF 25th International Conference and SWET 2019 as well as staff members of the Bank of Japan for valuable comments. The views expressed in this paper are those of the authors and do not necessarily reflect the official views of the Bank of Japan.

  1. *1Department of Economics, University of Tokyo
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  2. *2Research and Statistics Department, Bank of Japan (currently at the Financial System and Bank Examination Department)
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  3. *3Research and Statistics Department, Bank of Japan
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