Who Gets It Wrong? Inflation Dynamics Following a Misperceived Energy Price Shock

This paper examines the role of misperception in shaping the inflation dynamics of Thailand following the 2022 energy price shock. For this purpose, I evaluate whether a New Keynesian model of a small open economy featuring a signal extraction problem can replicate the inflation and broader macroeconomic dynamics observed in Thailand during this episode. The signal extraction problem arises because agents observe the terms-of-trade shock but cannot distinguish its constituent components, transitory versus persistent, and must therefore infer the underlying state via the Kalman filter. Four information regimes are compared: full information, symmetric limited information in which both the central bank and the private sector misperceive, and two asymmetric cases in which only one agent misperceives while the other correctly identifies the shock. A simple distance-based comparison against Thai data indicates that the symmetric limited information regime most plausibly characterizes the prevailing dynamics of the 2022 Thai economy. The asymmetric cases further reveal that the consequences of misperception depend critically on who gets it wrong. Central bank misperception produces a prolonged inflation surge alongside a relatively muted output contraction, while private-sector misperception keeps inflation contained at the cost of a sharper and more persistent output decline – a stark illustration of the inflation–output trade-off in action.