Inflation Expectations and Economic Decisions
Friday, Jan. 4, 2019 2:30 PM - 4:30 PM
- Chair: Olivier Coibion, University of Texas-Austin
Inflation Expectations and Firms' Decisions: New Causal Evidence
AbstractWe use a unique design feature of a survey of Italian firms to study the causal effect of inflation expectations on firms’ economic decisions. In the survey, a randomly chosen subset of firms is repeatedly treated with information about recent inflation (or the European Central Bank’s inflation target) whereas other firms are not. This information treatment generates exogenous variation in inflation expectations. We find that higher inflation expectations on the part of firms leads them to raise their prices, increase their utilization of credit, and reduce their employment. However, when policy rates are constrained by the effective lower bound, demand effects are stronger, leading firms to raise their prices more and no longer reduce their employment.
Inflation Expectations and Choices of Households: Evidence from Linked Survey and Administrative Data
AbstractHow do households form inflation expectations? Do their inflation expectations affect their choices? To address the first question, we study panel data on household inflation expectations for the period 1993-2016. We find that a standard model for the average inflation expectation (across households) also matches fairly well household-level data on inflation expectations. Turning to the second question, we link – at the household level – the survey data on inflation expectations to administrative data on income and wealth. Estimating panel data models, where change in or level of net worth is the dependent variable, we obtain a negative relationship between inflation expectations and savings, consistent with the common idea in academic and policy circles that an increase in inflation expectations stimulates spending.
Are Consumers’ Spending Decisions in Line with an Euler Equation?
AbstractEvaluating a new survey of German consumers, we test whether individual consumption spending decisions are formed according to an Euler equation model. We thus evaluate whether individual current consumption spending is positively related to expected spending, negatively to expected nominal interest rates and positively to expected inflation. We are thus able to distinguish between two different channels via which the perceived real interest rate may affect current spending decisions. Our results are overall supportive of the Euler equation model: We find a significantly positive correlation between current consumption and both expected spending as well as expected inflation, and a significantly negative correlation with expected nominal interest rates in the subsample of financially literate households. These results remain robust with both qualitative and quantitative expectations and once we control for the role of perceived inflation. In addition, we evaluate whether the impact of interest rate and inflation expectations becomes stronger if the consumer observed monetary or financial market news. Overall, inflation expectations affect current spending decisions more strongly if the consumer heard any news on monetary policy or inflation, while the effect of nominal interest expectations becomes stronger if she heard news on financial markets. These news effects are particularly pronounced for consumers who save and who are thus able to use the perceived real interest rate for their consumption-smoothing. Overall, these results imply that consumers incorporate new information into their economic decision-making in a meaningful way.
- E3 - Prices, Business Fluctuations, and Cycles
- E7 - Macro-Based Behavioral Economics