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Inflation attention and optimal decisions: Consumption/savings puzzle and asset prices

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  • Jang, Chul
  • Park, Seyoung

Abstract

This paper investigates the inflation attention effect on consumption, savings, and portfolio choice for an individual. The individual is exposed to an uncertain inflation shock which can raise her inflation attention. The individual consumes and invests a constant fraction of her total wealth, but the heightened inflation attention results in a consumption cutback with savings increased. Using a general equilibrium analysis, we show that low consumption and high savings with the identified inflation risk premium results in a lower interest rate and higher equity premium.

Suggested Citation

  • Jang, Chul & Park, Seyoung, 2026. "Inflation attention and optimal decisions: Consumption/savings puzzle and asset prices," Economics Letters, Elsevier, vol. 261(C).
    • Handle: RePEc:eee:ecolet:v:261:y:2026:i:c:s0165176526000583
    DOI: 10.1016/j.econlet.2026.112864
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    Keywords

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    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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