The relationship between media bias and inflation expectations in P.R. China

Abstract

The fact that predictions of inflation can create a self-fulfilling expectations trap creates a powerful incentive to balance output and inflation. Media reports, as a source of public information, contribute to formation of inflation expectations. We investigate how media coverage and possible media bias may affect inflation expectations using the sticky information paradigm and Bayesian learning theory. The findings suggest that the quantity of media reports may or may not affect inflation expectations, depending on media bias and the economic climate. However, media bias explicitly expands the deviation between expected and actual inflation, making media content more important to manage than volume of coverage for controlling inflation expectations.