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Monetary policy announcements, consumers’ inflation expectations, and readiness to spend

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  • Breitenlechner, Max
  • Geiger, Martin
  • Scharler, Johann

Abstract

Can monetary policy stimulate consumption through inflation expectations? We study how US consumers revise inflation expectations and readiness to spend in response to monetary policy shocks using a structural vector-autoregressive model, where we identify exogenous policy shocks with interest rate surprises around FOMC announcements. Based on survey data, we construct measures of changes in consumers’ readiness to spend conditional on how consumers update their inflation expectations. Expansionary policy shocks tend to increase readiness to spend conditional on higher expected inflation outside the zero lower bound (ZLB), but the effect is small. At the ZLB, consumers increasingly reduce their readiness to spend if they expect higher inflation. Overall, we find only limited evidence suggesting that policy-induced variations in inflation expectations are associated with adjustments that are in line with the predictions of standard macroeconomic models.

Suggested Citation

  • Breitenlechner, Max & Geiger, Martin & Scharler, Johann, 2024. "Monetary policy announcements, consumers’ inflation expectations, and readiness to spend," Macroeconomic Dynamics, Cambridge University Press, vol. 28(2), pages 277-298, March.
  • Handle: RePEc:cup:macdyn:v:28:y:2024:i:2:p:277-298_1
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