A0350
Title: Inflation and attention: Evidence from the market reaction to macro announcements
Authors: Niklas Kroner - Federal Reserve Board (United States) [presenting]
Abstract: Do people pay more attention to inflation when it is high? A large class of behavioural models in macroeconomics would predict that. This prediction is tested by studying the financial market impact of U.S. macroeconomic news announcements following the 2021 inflation surge. It is shown that the effect of inflation news on interest rates, measured in a 30-minute window around announcements, is much stronger since 2021. In particular, a surprise in the consumer price index (CPI) leads, on average, to a more than 10 times larger effect on yields compared to the prior, low inflation period following the Great Recession. There is consistent evidence for other asset prices such as inflation swap rates, stocks, exchange rates, and foreign interest rates. Importantly, the increased sensitivity of inflation swap rates indicates that the results are driven by a faster incorporation of inflation news into inflation expectations. Further, trading volume and Google searches around releases further support an attention-based explanation. Overall, findings support theories of rational information choice such as "rational inattention". The evidence also highlights the role of macroeconomic conditions in understanding the link between investor attention, macro news, and asset prices.
