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Household perceptions of the sources of business cycle fluctuations: a tale of supply and demand

Author

Listed:
  • Clodomiro Ferreira

    (Bank of Spain)

  • Stefano Pica

    (Bank of Italy)

Abstract

We study household expectations for a wide range of macroeconomic and individual-level variables in the six largest euro area countries. Although households disagree in their survey responses, their expectations are correlated in the cross-section. Two principal components account for a significant portion of the variance of all expectations. These components capture household perceptions of the sources of macroeconomic dynamics, with the first capturing supply-side views and the second component reflecting demand-side views. This structure of perceptions and disagreement is stable across countries and over time and does not vary with demographic or socioeconomic characteristics. We then use these insights to identify two common factors driving expectations over time. These factors are consistent with a narrative based on perceived supply-side inflationary pressures after the invasion of Ukraine in February 2022. Recent monetary policy tightening has impacted both factors, with a negative effect on economic growth expectations and ambivalent effects on inflation expectations. We conclude that understanding how people think about price increases is crucial for managing inflation expectations.

Suggested Citation

  • Clodomiro Ferreira & Stefano Pica, 2024. "Household perceptions of the sources of business cycle fluctuations: a tale of supply and demand," Temi di discussione (Economic working papers) 1441, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_1441_24
    as

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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2024/2024-1441/en_tema_1441.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    survey; expectations; inflation; output; supply; demand;
    All these keywords.

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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