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Inflation Expectations and Readiness to Spend: Cross-Sectional Evidence

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  • Rüdiger Bachmann
  • Tim O. Berg
  • Eric R. Sims

Abstract

There have recently been suggestions for monetary policy to engineer higher inflation expectations so as to stimulate current spending. But what is the empirical relationship between inflation expectations and spending? We use the underlying micro data from the Michigan Survey of Consumers to test whether increased inflation expectations are indeed associated with greater reported readiness to spend. Cross-sectional data deliver the necessary variation to test whether the relationship between inflation expectations and spending changes in the recent zero lower bound regime compared to normal times, as suggested by many standard models. We find that the impact of inflation expectations on the reported readiness to spend on durable goods is statistically insignificant and small in absolute value when compared to other variables, such as household income or expected business conditions. Moreover, it appears that higher expected price changes have an adverse impact on the reported readiness to spend. A one percent increase in expected inflation reduces the probability that households have a positive attitude towards spending by about 0.1 percentage points. At the zero lower bound this small adverse effect remains, and is, if anything, slightly stronger. We also extend our analysis to the reported readiness to spend on cars and houses and obtain similar results. Altogether our results tell a cautionary tale for monetary (or fiscal) policy designed to engineer inflation expectations in order to generate greater current spending.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17958.

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Date of creation: Mar 2012
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Publication status: published as “Inflation Expectations and Readiness to Spend at the Zero Lower Bound: Cross-Sectional Evidence” with Rudi Bachmann and Tim Berg (January 2014), forthcoming, American Economic Journal: Economic Policy
Handle: RePEc:nbr:nberwo:17958

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  1. Nicholas Bloom, 2007. "The Impact of Uncertainty Shocks," NBER Working Papers 13385, National Bureau of Economic Research, Inc.
  2. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 119(1), pages 78 - 121.
  3. S. Boragan Aruoba & Frank Schorfheide, 2009. "Sticky prices versus monetary frictions: an estimation of policy trade-offs," Working Papers 09-8, Federal Reserve Bank of Philadelphia.
  4. Bartosz Mackowiak & Mirko Wiederholt, 2008. "Business Cycle Dynamics under Rational Inattention," 2008 Meeting Papers 1059, Society for Economic Dynamics.
  5. Carlos Carvalho & Fernanda Nechio, 2012. "Do people undestand monetary policy?," Working Paper Series, Federal Reserve Bank of San Francisco 2012-01, Federal Reserve Bank of San Francisco.
  6. Olivier Coibion & Yuriy Gorodnichenko, 2008. "What Can Survey Forecasts Tell Us About Informational Rigidities?," NBER Working Papers 14586, National Bureau of Economic Research, Inc.
  7. Xavier Gabaix, 2012. "Boundedly Rational Dynamic Programming: Some Preliminary Results," NBER Working Papers 17783, National Bureau of Economic Research, Inc.
  8. Souleles, Nicholas S, 2004. "Expectations, Heterogeneous Forecast Errors, and Consumption: Micro Evidence from the Michigan Consumer Sentiment Surveys," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 36(1), pages 39-72, February.
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Cited by:
  1. Coibion, Olivier & Gorodnichenko, Yuriy & Koustas, Dmitri, 2013. "Amerisclerosis? The Puzzle of Rising U.S. Unemployment Persistence," IZA Discussion Papers 7715, Institute for the Study of Labor (IZA).
  2. Michael J. Lamla & Lena Dräger & Damjan Pfajfar, 2013. "Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication," KOF Working papers, KOF Swiss Economic Institute, ETH Zurich 13-345, KOF Swiss Economic Institute, ETH Zurich.
  3. Eva Arnold & Lena Dräger & Ulrich Fritsche, 2014. "Evaluating the Link between Consumers' Savings Portfolio Decisions, their Inflation Expectations and Economic News," Macroeconomics and Finance Series, Hamburg University, Department Wirtschaft und Politik 201402, Hamburg University, Department Wirtschaft und Politik.
  4. Burke, Mary A. & Ozdagli, Ali K., 2013. "Household inflation expectations and consumer spending: evidence from panel data," Working Papers, Federal Reserve Bank of Boston 13-25, Federal Reserve Bank of Boston.
  5. Fernanda Nechio & Carlos Carvalho, 2012. "Do People Understand Monetary Policy?," 2012 Meeting Papers, Society for Economic Dynamics 426, Society for Economic Dynamics.

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