Experiences, Expectations and Actions
Sunday, Jan. 8, 2017 1:00 PM – 3:00 PM
- Chair: Johannes Stroebel, New York University
Salient Consumption and Inflation Expectations
AbstractInflation expectations vary substantially across individuals with women, less educated, and poorer individuals having on average higher inflation expectations. Inflation expectations play a central role in economic theory and policy-making but we still have little knowledge on how households form inflation expectations. We show households’ personal consumption experience and the associated price changes in consumption baskets shape households' inflation expectations. Salient price changes, that is, large price changes and price changes of goods households purchase frequently have a substantially larger impact on the perceived and expected inflation than what is predicted by their weight in the consumption bundle. These findings hold only for household members frequently doing the groceries independent of sex. Individuals act on their inflation expectations. Survey participants with higher inflation expectations are less likely to hold nominal bonds, expect higher nominal rates, and are more willing to purchase durable goods. We run our own survey on all 50,000 households’ members in the AC Nielsen Homescan panel and match it to their consumption data from AC Nielsen.
Home Price Expectations and Behavior: Evidence From a Randomized Information Experiment
AbstractHome price expectations are believed to play an important role in housing dynamics, yet we have limited understanding of how they are formed and how they affect behavior. Using a unique “information experiment” embedded in an online survey, this paper investigates how consumers’ home price expectations respond to past home price growth and how they impact investment decisions. After eliciting respondents’ initial beliefs about past and future local home price changes, we present a random subset of the respondents with factual information about past (one- or five-year) changes and then re-elicit expectations. This unique “panel” data allows us to identify causal effects of the information and provides insights on the expectation formation process. We find that, on average, year-ahead home price expectations are revised in a way consistent with short-term momentum in home price growth, though respondents tend to underpredict the strength of momentum. Revisions of longer-term expectations show that respondents do not expect the empirically occurring mean reversion in home price growth. These results are consistent with recent behavioral models of housing cycles. Finally, we present robust evidence of home price expectations impacting (actual and intended) housing-related behaviors, both in the cross section and within-individual.
Rent or Buy? The Role of Lifetime Experiences of Macroeconomic Shocks Within and Across Countries
AbstractThere are vast differences in homeownership rates across countries. We show that decision to buy versus rent is strongly affected by macroeconomic shocks that occurred in a country during the person’s lifetime so far, specifically experiences of inflation and house prices. Households are more likely to own their home when they anticipate increasing house prices or high inflation in the future, and experience effects imply that they overweight on their own experiences when forming these expectations. Using household-level data from 13 countries in the European Central Bank’s Household Finance and Consumption Survey (HFCS), we exploit differences in individual histories of inflation and house price experiences to identify their effect on homeownership rates. We find that experiences of high inflation and increasing house prices are correlated with increased likelihood of being a homeowner at the individual level and higher homeownership rates at the national level.
- G1 - Asset Markets and Pricing
- R2 - Household Analysis