IDEAS home Printed from https://ideas.repec.org/p/ecb/ecbwps/20182196.html
   My bibliography  Save this paper

Inflation expectations, consumption and the lower bound: micro evidence from a large euro area survey

Author

Listed:
  • Duca, Ioana A.
  • Kenny, Geoff
  • Reuter, Andreas

Abstract

This paper exploits a very large multi-country survey of consumers to investigate empirically the relationship between inflation expectations and consumer spending. We document that for the Euro Area and almost all of its constituent countries this relationship is generally positive: a higher expected change in inflation is associated with an increase in the probability that a given consumer will make major purchases. Moreover, in line with the predictions of macroeconomic theory, the impact is stronger when the lower bound on nominal interest rates is binding. Also, using the estimated spending probabilities from our micro-level analysis, we indirectly estimate the impact of a gradual increase in inflation expectations on aggregate private consumption. We find the effects to be economically relevant, especially when the lower bound is binding. JEL Classification: E21, E31, E52, D12, D84

Suggested Citation

  • Duca, Ioana A. & Kenny, Geoff & Reuter, Andreas, 2018. "Inflation expectations, consumption and the lower bound: micro evidence from a large euro area survey," Working Paper Series 2196, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20182196
    Note: 339061
    as

    Download full text from publisher

    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2196.en.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Hibiki Ichiue & Shusaku Nishiguchi, 2015. "Inflation Expectations And Consumer Spending At The Zero Bound: Micro Evidence," Economic Inquiry, Western Economic Association International, vol. 53(2), pages 1086-1107, April.
    2. Olivier Armantier & Scott Nelson & Giorgio Topa & Wilbert van der Klaauw & Basit Zafar, 2016. "The Price Is Right: Updating Inflation Expectations in a Randomized Price Information Experiment," The Review of Economics and Statistics, MIT Press, vol. 98(3), pages 503-523, July.
    3. Olivier Armantier & Wändi Bruine de Bruin & Giorgio Topa & Wilbert van der Klaauw & Basit Zafar, 2015. "Inflation Expectations And Behavior: Do Survey Respondents Act On Their Beliefs?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56(2), pages 505-536, May.
    4. Michael Ehrmann & Damjan Pfajfar & Emiliano Santoro, 2017. "Consumers' Attitudes and Their Inflation Expectations," International Journal of Central Banking, International Journal of Central Banking, vol. 13(1), pages 225-259, February.
    5. Paul R. Krugman, 1998. "It's Baaack: Japan's Slump and the Return of the Liquidity Trap," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 137-206.
    6. Olivier Coibion & Yuriy Gorodnichenko & Rupal Kamdar, 2018. "The Formation of Expectations, Inflation, and the Phillips Curve," Journal of Economic Literature, American Economic Association, vol. 56(4), pages 1447-1491, December.
    7. Mary A. Burke & Ali K. Ozdagli, 2013. "Household inflation expectations and consumer spending: evidence from panel data," Working Papers 13-25, Federal Reserve Bank of Boston.
    8. Olivier Blanchard & Giovanni Dell’Ariccia & Paolo Mauro, 2010. "Rethinking Macroeconomic Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 199-215, September.
    9. Michael Ehrmann, 2011. "Inflation Developments and Perceptions after the Euro Cash Changeover," German Economic Review, Verein für Socialpolitik, vol. 12(1), pages 33-58, February.
    10. Olivier Armantier & Wändi Bruine de Bruin & Giorgio Topa & Wilbert Klaauw & Basit Zafar, 2015. "Inflation Expectations And Behavior: Do Survey Respondents Act On Their Beliefs?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56, pages 505-536, May.
    11. Eggertsson, Gauti B., 2006. "The Deflation Bias and Committing to Being Irresponsible," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(2), pages 283-321, March.
    12. Richard K. Crump & Stefano Eusepi & Andrea Tambalotti & Giorgio Topa, 2015. "Subjective Intertemporal Substitution," Staff Reports 734, Federal Reserve Bank of New York.
    13. Ulrike Malmendier & Stefan Nagel, 2016. "Learning from Inflation Experiences," The Quarterly Journal of Economics, Oxford University Press, vol. 131(1), pages 53-87.
    14. Olivier Coibion & Yuriy Gorodnichenko, 2015. "Is the Phillips Curve Alive and Well after All? Inflation Expectations and the Missing Disinflation," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 197-232, January.
    15. Rüdiger Bachmann & Tim O. Berg & Eric R. Sims, 2015. "Inflation Expectations and Readiness to Spend: Cross-Sectional Evidence," American Economic Journal: Economic Policy, American Economic Association, vol. 7(1), pages 1-35, February.
    16. Francesco D'Acunto & Daniel Hoang & Michael Weber, 2018. "Unconventional Fiscal Policy," AEA Papers and Proceedings, American Economic Association, vol. 108, pages 519-523, May.
    17. Christopher D. Carroll, 2003. "Macroeconomic Expectations of Households and Professional Forecasters," The Quarterly Journal of Economics, Oxford University Press, vol. 118(1), pages 269-298.
    18. Francesco D’Acunto & Daniel Hoang & Michael Weber, 2017. "The Effect of Unconventional Fiscal Policy on Consumption Expenditure," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 15(01), pages 09-11, April.
    19. Souleles, Nicholas S, 2004. "Expectations, Heterogeneous Forecast Errors, and Consumption: Micro Evidence from the Michigan Consumer Sentiment Surveys," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(1), pages 39-72, February.
    20. Charles F. Manski, 2004. "Measuring Expectations," Econometrica, Econometric Society, vol. 72(5), pages 1329-1376, September.
    21. Rodolfo Arioli & Colm Bates & Heinz Dieden & Ioana Duca & Roberta Friz & Christian Gayer & Geoff Kenny & Aidan Meyler & Iskra Pavlova, 2016. "EU Consumers’ Quantitative Inflation Perceptions and Expectations: An Evaluation," European Economy - Discussion Papers 2015 - 038, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    22. Binder, Carola C., 2017. "Measuring uncertainty based on rounding: New method and application to inflation expectations," Journal of Monetary Economics, Elsevier, vol. 90(C), pages 1-12.
    23. Robert D. J. Anderson, 2008. "US Consumer Inflation Expectations: Evidence Regarding Learning, Accuracy and Demographics," Centre for Growth and Business Cycle Research Discussion Paper Series 99, Economics, The University of Manchester.
    24. Kevin L. Kliesen, 2015. "How Accurate Are Measures of Long-Term Inflation Expectations?," Economic Synopses, Federal Reserve Bank of St. Louis, issue 9.
    25. Céline Christensen & Peter Els & Maarten Rooij, 2006. "Dutch Households’ Perceptions of Economic Growth and Inflation," De Economist, Springer, vol. 154(2), pages 277-294, June.
    26. Jung, Taehun & Teranishi, Yuki & Watanabe, Tsutomu, 2005. "Optimal Monetary Policy at the Zero-Interest-Rate Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 813-835, October.
    27. Olivier Blanchard & Giovanni Dell'Ariccia & Paolo Mauro, 2010. "Rethinking Macroeconomic Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 199-215, September.
    28. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information: A Model of Monetary Nonneutrality and Structural Slumps," NBER Working Papers 8614, National Bureau of Economic Research, Inc.
    29. Jonung, Lars, 1981. "Perceived and Expected Rates of Inflation in Sweden," American Economic Review, American Economic Association, vol. 71(5), pages 961-968, December.
    30. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
    31. Michael F. Bryan & Guhan Venkatu, 2001. "The demographics of inflation opinion surveys," Economic Commentary, Federal Reserve Bank of Cleveland, issue Oct.
    32. Vestin, David, 2006. "Price-level versus inflation targeting," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1361-1376, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Coibion, Olivier & Georgarakos, Dimitris & Gorodnichenko, Yuriy & van Rooij, Maarten, 2019. "How Does Consumption Respond to News about Inflation? Field Evidence from a Randomized Control Trial," Department of Economics, Working Paper Series qt3zh865pj, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    2. Haldane, Andrew & Macaulay, Alistair & McMahon, Michael, 2020. "The 3 E’s of central bank communication with the public," Bank of England working papers 847, Bank of England.
    3. Lieb, Lenard & Schuffels, Johannes, 2020. "Inflation expectations and consumer spending: the role of household balance sheets (RM/19/022-revised-)," Research Memorandum 006, Maastricht University, Graduate School of Business and Economics (GSBE).
    4. Coibion, Olivier & Gorodnichenko, Yuriy & Kumar, Saten & Pedemonte, Mathieu, 2020. "Inflation expectations as a policy tool?," Journal of International Economics, Elsevier, vol. 124(C).
    5. Gabriele Galati & Richhild Moessner & Maarten van Rooij, 2020. "The anchoring of long-term inflation expectations of consumers: insights from a new survey," DNB Working Papers 688, Netherlands Central Bank, Research Department.
    6. Lieb, Lenard & Schuffels, Johannes, 2019. "Inflation expectations and consumer spending: the role of household balance sheets," Research Memorandum 022, Maastricht University, Graduate School of Business and Economics (GSBE).
    7. Hills, Timothy S. & Nakata, Taisuke & Schmidt, Sebastian, 2019. "Effective lower bound risk," European Economic Review, Elsevier, vol. 120(C).
    8. Lena Dräger & Michael J. Lamla & Damjan Pfajfar, 2020. "The Hidden Heterogeneity of Inflation Expectations and its Implications," Finance and Economics Discussion Series 2020-054, Board of Governors of the Federal Reserve System (U.S.).
    9. Dräger, Lena & Lamla, Michael J. & Pfajfar, Damjan, 2020. "The Hidden Heterogeneity of Inflation and Interest Rate Expectations: The Role of Preferences," Hannover Economic Papers (HEP) dp-666, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät, revised Jun 2021.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Coibion, Olivier & Gorodnichenko, Yuriy & Kumar, Saten & Pedemonte, Mathieu, 2020. "Inflation expectations as a policy tool?," Journal of International Economics, Elsevier, vol. 124(C).
    2. Erwan Gautier & Eric Mengus, 2020. "What Matters in Households’ Inflation Expectations?Author-Name: Philippe Andrade," Working papers 770, Banque de France.
    3. Francesco D’Acunto & Daniel Hoang & Michael Weber, 2017. "The Effect of Unconventional Fiscal Policy on Consumption Expenditure," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 15(01), pages 09-11, April.
    4. Francesco D'Acunto & Daniel Hoang & Michael Weber & Michael Weber, 2016. "Unconventional Fiscal Policy, Inflation Expectations, and Consumption Expenditure," CESifo Working Paper Series 5793, CESifo.
    5. Francesco D'Acunto & Daniel Hoang & Maritta Paloviita & Michael Weber, 2019. "Human Frictions to the Transmission of Economic Policy," 2019 Meeting Papers 339, Society for Economic Dynamics.
    6. Michael Weber & Daniel Hoang & Francesco D'Acunto, 2015. "Inflation Expectations and Consumption Expenditure," 2015 Meeting Papers 1266, Society for Economic Dynamics.
    7. Francesco D’Acunto & Daniel Hoang & Michael Weber, 2020. "Managing Households' Expectations with Unconventional Policies," NBER Working Papers 27399, National Bureau of Economic Research, Inc.
    8. David-Jan Jansen & Matthias Neuenkirch, 2017. "News Consumption, Political Preferences, and Accurate Views on Inflation," Research Papers in Economics 2017-03, University of Trier, Department of Economics.
    9. D'Acunto, Francesco & Hoang, Daniel & Paloviita, Maritta & Weber, Michael, 2019. "IQ, expectations, and choice," Working Paper Series in Economics 127, Karlsruhe Institute of Technology (KIT), Department of Economics and Management.
    10. Cecion, Martina & Coenen, Günter & Gerke, Rafael & Le Bihan, Hervé & Motto, Roberto & Aguilar, Pablo & Ajevskis, Viktors & Giesen, Sebastian & Albertazzi, Ugo & Gilbert, Niels & Al-Haschimi, Alexander, 2021. "The ECB’s price stability framework: past experience, and current and future challenges," Occasional Paper Series 269, European Central Bank.
    11. Goldfayn-Frank, Olga & Wohlfart, Johannes, 2020. "Expectation formation in a new environment: Evidence from the German reunification," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 301-320.
    12. Duca-Radu, Ioana & Kenny, Geoff & Reuter, Andreas, 2021. "Inflation expectations, consumption and the lower bound: Micro evidence from a large multi-country survey," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 120-134.
    13. Martin Geiger & Johann Scharler, 2021. "How Do People Interpret Macroeconomic Shocks? Evidence from U.S. Survey Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(4), pages 813-843, June.
    14. Larsen, Vegard H. & Thorsrud, Leif Anders & Zhulanova, Julia, 2021. "News-driven inflation expectations and information rigidities," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 507-520.
    15. Abildgren, Kim & Kuchler, Andreas, 2021. "Revisiting the inflation perception conundrum," Journal of Macroeconomics, Elsevier, vol. 67(C).
    16. Dräger, Lena & Lamla, Michael J. & Pfajfar, Damjan, 2020. "The Hidden Heterogeneity of Inflation and Interest Rate Expectations: The Role of Preferences," Hannover Economic Papers (HEP) dp-666, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät, revised Jun 2021.
    17. Hills, Timothy S. & Nakata, Taisuke & Schmidt, Sebastian, 2019. "Effective lower bound risk," European Economic Review, Elsevier, vol. 120(C).
    18. Lena Dräger & Michael J. Lamla & Damjan Pfajfar, 2020. "The Hidden Heterogeneity of Inflation Expectations and its Implications," Finance and Economics Discussion Series 2020-054, Board of Governors of the Federal Reserve System (U.S.).
    19. Michau, Jean-Baptiste, 2019. "Monetary and fiscal policy in a liquidity trap with inflation persistence," Journal of Economic Dynamics and Control, Elsevier, vol. 100(C), pages 1-28.
    20. Rossmann, Tobias, 2019. "Economic Uncertainty and Subjective Inflation Expectations," Rationality and Competition Discussion Paper Series 160, CRC TRR 190 Rationality and Competition.

    More about this item

    Keywords

    consumer inflation expectations; consumption; lower bound; micro data;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:20182196. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/emieude.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Official Publications (email available below). General contact details of provider: https://edirc.repec.org/data/emieude.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.