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Are Consumers' Spending Decisions in Line with A Euler Equation?

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  • Lena Dräger

    (Leibniz University Hannover)

  • Giang Nghiem

    (Goethe-University Frankfurt am Main and Leibniz University)

Abstract

Evaluating a new survey of German consumers, we test whether individual consumption spending decisions are formed according to a Euler equation model. We find that consumers are more likely to increase current spending if they plan to increase spending in the future and if they expect higher inflation. In the subsample of financially literate households, we find an additional negative effect of nominal interest rate expectations. The effects of macroeconomic expectations become stronger if consumers observed news on monetary policy or financial markets. These news effects are particularly pronounced for consumers who save and those with low inflation forecast accuracy.

Suggested Citation

  • Lena Dräger & Giang Nghiem, 2021. "Are Consumers' Spending Decisions in Line with A Euler Equation?," The Review of Economics and Statistics, MIT Press, vol. 103(3), pages 580-596, July.
  • Handle: RePEc:tpr:restat:v:103:y:2021:i:3:p:580-596
    DOI: 10.1162/rest_a_00909
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    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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