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Inflation Expectations and Readiness to Spend: Cross-Sectional Evidence

  • Rüdiger Bachmann
  • Tim O. Berg
  • Eric R. Sims

There have recently been suggestions for monetary policy to engineer higher inflation expectations so as to stimulate current spending. But what is the empirical relationship between inflation expectations and spending? We use the underlying micro data from the Michigan Survey of Consumers to test whether increased inflation expectations are indeed associated with greater reported readiness to spend. Cross-sectional data deliver the necessary variation to test whether the relationship between inflation expectations and spending changes in the recent zero lower bound regime compared to normal times, as suggested by many standard models. We find that the impact of inflation expectations on the reported readiness to spend on durable goods is statistically insignificant and small in absolute value when compared to other variables, such as household income or expected business conditions. Moreover, it appears that higher expected price changes have an adverse impact on the reported readiness to spend. A one percent increase in expected inflation reduces the probability that households have a positive attitude towards spending by about 0.1 percentage points. At the zero lower bound this small adverse effect remains, and is, if anything, slightly stronger. We also extend our analysis to the reported readiness to spend on cars and houses and obtain similar results. Altogether our results tell a cautionary tale for monetary (or fiscal) policy designed to engineer inflation expectations in order to generate greater current spending.

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File URL: http://www.nber.org/papers/w17958.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17958.

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Date of creation: Mar 2012
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Publication status: published as “Inflation Expectations and Readiness to Spend at the Zero Lower Bound: Cross-Sectional Evidence” with Rudi Bachmann and Tim Berg (January 2014), forthcoming, American Economic Journal: Economic Policy
Handle: RePEc:nbr:nberwo:17958
Note: EFG ME
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  1. Olivier Coibion & Yuriy Gorodnichenko, 2012. "What Can Survey Forecasts Tell Us about Information Rigidities?," Journal of Political Economy, University of Chicago Press, vol. 120(1), pages 116 - 159.
  2. Carlos Carvalho & Fernanda Nechio, 2013. "Do People Understand Monetary Policy?," Textos para discussão 618, Department of Economics PUC-Rio (Brazil).
  3. S. Boragan Aruoba & Frank Schorfheide, 2009. "Sticky Prices Versus Monetary Frictions: An Estimation of Policy Trade-offs," NBER Working Papers 14870, National Bureau of Economic Research, Inc.
  4. Bartosz Mackowiak & Mirko Wiederholt, 2008. "Business Cycle Dynamics under Rational Inattention," 2008 Meeting Papers 1059, Society for Economic Dynamics.
  5. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, 05.
  6. Lawrence J. Christiano & Martin Eichenbaum & Sergio Rebelo, 2010. "When is the government spending multiplier large?," CQER Working Paper 2010-01, Federal Reserve Bank of Atlanta.
  7. Gabaix, Xavier, 2012. "Boundedly Rational Dynamic Programming: Some Preliminary Results," CEPR Discussion Papers 8813, C.E.P.R. Discussion Papers.
  8. 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.
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