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Are Consumers’ Spending Decisions in Line With an Euler Equation?

Author

Listed:
  • Lena Dräger

    () (Johannes Gutenberg University Mainz)

  • Giang Nghiem

    () (Goethe-University Frankfurt am Main)

Abstract

Evaluating two new survey datasets of German consumers, we test whether individual consumption spending decisions are formed according to an Euler equation derived from consumption life-cycle models. Measured in qualitative individual changes, our results suggest that current and planned spending are positively correlated, thus supporting the hypothesis of consumption smoothing. Also, current spending is positively correlated with inflation expectations, and negatively with nominal interest rate expectations. Interestingly, the effect of perceived real interest rates is only significant for financial market participants, financially unconstrained households and those with high financial literacy, implying that these are important conditions for the ability to smooth consumption over time. Moreover, these households are better positioned in the wealth and income distributions. In that sense, the ability to smooth consumption may be a channel through which distributional effects of policy shocks may occur. Finally, news on inflation and monetary policy observed by the consumer strengthen the effect of their inflation expectations on current spending, suggesting that imperfect information may also influence the Euler equation relationship.

Suggested Citation

  • Lena Dräger & Giang Nghiem, 2016. "Are Consumers’ Spending Decisions in Line With an Euler Equation?," Working Papers 1802, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 26 Jan 2018.
  • Handle: RePEc:jgu:wpaper:1802
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    References listed on IDEAS

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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Are Consumers’ Spending Decisions in Line With an Euler Equation?
      by Christian Zimmermann in NEP-DGE blog on 2018-03-06 11:49:11

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    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. Olivier Coibion & Yuriy Gorodnichenko & Tiziano Ropele, 2020. "Inflation Expectations and Firm Decisions: New Causal Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 135(1), pages 165-219.
    3. 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.
    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. Andrade, Philippe & Gautier, Erwan & Mengus, Eric, 2020. "What Matters in Households' Inflation Expectations?," CEPR Discussion Papers 14905, C.E.P.R. Discussion Papers.
    6. Dräger, Lena & Lamla, Michael J. & Pfajfar, Damjan, 2020. "The Hidden Heterogeneity of Inflation Expectations and its Implications," Hannover Economic Papers (HEP) dp-666, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    7. Christian Conrad & Zeno Enders & Alexander Glas, 2020. "The Role of Information and Experience for Households' Inflation Expectations," CESifo Working Paper Series 8528, CESifo.
    8. Saakshi Jha & Sohini Sahu, 2020. "Forecasting inflation for India with the Phillips Curve: Evidence from internet search data," Economics Bulletin, AccessEcon, vol. 40(3), pages 2372-2379.
    9. Erwan Gautier & Eric Mengus, 2020. "What Matters in Households’ Inflation Expectations?Author-Name: Philippe Andrade," Working papers 770, Banque de France.
    10. 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.
    11. Bui, Dzung & Dräger, Lena & Hayo, Bernd & Nghiem, Giang, 2020. "Consumer Sentiment During the COVID-19 Pandemic: The Role of Others‘ Beliefs," Hannover Economic Papers (HEP) dp-680, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät, revised Apr 2021.
    12. Hibiki Ichiue & Maiko Koga & Tatsushi Okuda & Tatsuya Ozaki, 2019. "Households' Liquidity Constraint, Optimal Attention Allocation, and Inflation Expectations," Bank of Japan Working Paper Series 19-E-8, Bank of Japan.
    13. Brent Meyer & Nicholas B. Parker & Xuguang Sheng, 2021. "Unit Cost Expectations and Uncertainty: Firms' Perspectives on Inflation," FRB Atlanta Working Paper 2021-12, Federal Reserve Bank of Atlanta.
    14. Adriana Grasso & Tiziano Ropele, 2018. "Firms’ inflation expectations and investment plans," Temi di discussione (Economic working papers) 1203, Bank of Italy, Economic Research and International Relations Area.
    15. Conrad, Christian & Enders, Zeno & Glas, Alexander, 2021. "The role of information and experience for households' inflation expectations," Discussion Papers 07/2021, Deutsche Bundesbank.

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    More about this item

    Keywords

    Euler equation; consumption plans; macroeconomic expectations; households; survey micro data;
    All these keywords.

    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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