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

Author

Listed:
  • Merike Kukk
  • Jan Toczynski

Abstract

Using individual level panel data from a period of volatile inflation in Estonia in 2005-11 and interactive fixed effect estimation, we find individual consumption to respond to personal inflation beyond the headline rate. Households are exposed to different inflation due to different consumption baskets. For each percentage point of higher personal inflation exposure, they increase consumption by more than 1%, and also increase stock market investments. These responses are consistent with backwardlooking inflation expectations. They are financed with savings or borrowing, except when the household is liquidity-constrained or over-indebted. Extra demand when inflation is already high can make inflation persistent and dependent on its current distribution

Suggested Citation

  • Merike Kukk & Jan Toczynski, 2024. "Beyond the Headline: How Personal Exposure to Inflation Shapes the Financial Choices of Households," Bank of Estonia Working Papers wp2023-07, Bank of Estonia, revised 23 Feb 2024.
    • Handle: RePEc:eea:boewps:wp2023-07
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    File URL: http://www.bankofestonia.info/pub/en/dokumendid/publikatsioonid/seeriad/uuringud//DOI:10.23656/25045520/072023/0206
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    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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