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An Experiment on Consumption Responses to Future Prices and Interest Rates

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  • Wolfgang J. Luhan

    ()

  • Michael W.M. Roos
  • Johann Scharler

Abstract

We design an experiment to investigate the influence of announced future variations in interest rates and prices on consumption decisions. In an experimental implementation of the discounted utility model, the subjects learn the entire paths of inflation and interest rates prior to deciding on a consumption path. We decompose the total change in consumption that results from changes in either interest rates or inflation rates into anticipation and impact effects. While impact effects are of similar orders of magnitude as in the model, future changes in inflation or interest rates exert substantially smaller effects on current consumption than predicted by the model.

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File URL: http://repec.rwi-essen.de/files/REP_11_248.pdf
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Bibliographic Info

Paper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen in its series Ruhr Economic Papers with number 0248.

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Length: 26 pages
Date of creation: Apr 2011
Date of revision:
Handle: RePEc:rwi:repape:0248

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Related research

Keywords: Consumption; saving; intertemporal utility maximization; macroeconomic experiment;

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