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Inflation Expectations and Readiness to Spend, Cross-Sectional Evidence

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  • Eric R. Sims

    ()
    (Department of Economics, University of Notre Dame)

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 in?ation 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 in?ation 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 insigni?cant 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 in?ation 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 in?ation expectations in order to generate greater current spending.

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File URL: http://www3.nd.edu/~tjohns20/RePEc/deendus/wpaper/015_expectations.pdf
File Function: First version, 2012
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Bibliographic Info

Paper provided by University of Notre Dame, Department of Economics in its series Working Papers with number 015.

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Length: 41 pages
Date of creation: Mar 2012
Date of revision: Mar 2012
Handle: RePEc:nod:wpaper:015

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Keywords: inflation expectations; durable goods; survey data; ordered probit; zero lower bound; spending on cars and houses; control function approach;

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  1. 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.
  2. Olivier Coibion & Yuriy Gorodnichenko, 2012. "What Can Survey Forecasts Tell Us about Information Rigidities?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 120(1), pages 116 - 159.
  3. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, Econometric Society, vol. 77(3), pages 623-685, 05.
  4. Bartosz Mackowiak & Mirko Wiederholt, 2008. "Business Cycle Dynamics under Rational Inattention," 2008 Meeting Papers 1059, Society for Economic Dynamics.
  5. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2009. "When is the government spending multiplier large?," NBER Working Papers 15394, National Bureau of Economic Research, Inc.
  6. 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.
  7. 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.
  8. Gabaix, Xavier, 2012. "Boundedly Rational Dynamic Programming: Some Preliminary Results," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8813, C.E.P.R. Discussion Papers.
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Cited by:
  1. 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.
  2. Olivier Coibion & Yuriy Gorodnichenko & Dmitri Koustas, 2013. "Amerisclerosis? The Puzzle of Rising U.S. Unemployment Persistence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 47(2 (Fall)), pages 193-260.
  3. Dräger, L. & Lamla, M.J. & Pfajfar, D., 2013. "Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication," Discussion Paper, Tilburg University, Center for Economic Research 2013-063, Tilburg University, Center for Economic Research.
  4. 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.
  5. 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.

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