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Beyond the Headline: How Personal Inflation Exposure Shapes Households’ Financial Choices

Author

Listed:
  • Christoph Basten

    (University of Zurich; Swiss Finance Institute; CESifo (Center for Economic Studies and Ifo Institute))

  • Merike Kukk

    (Tallinn University of Technology (TUT) - Department of Finance and Economics)

  • Jan Toczynski

    (University of Zurich and Swiss Finance Institute)

Abstract

Using unique account-level data from a high inflation period in Estonia in 2005-11 and interactive fixed effect estimation, we find individual consumption to depend on personal beyond national headline inflation. Foreign shocks to selected goods’ inflation affect disproportionately households with greater consumption basket weights on these goods and make them increase consumption by an extra 1.3% per percentage point of higher inflation exposure, financed with more net borrowing. Indebted households respond stronger, consistent with a debt depreciation effect. Resulting extra demand for goods with higher inflation can reinforce inflation, letting future inflation depend on its current distribution.

Suggested Citation

  • Christoph Basten & Merike Kukk & Jan Toczynski, 2023. "Beyond the Headline: How Personal Inflation Exposure Shapes Households’ Financial Choices," Swiss Finance Institute Research Paper Series 23-15, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2315
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    More about this item

    Keywords

    inflation heterogeneity; personal inflation exposure; consumption; borrowing; interactive fixed effects; intertemporal choices.;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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