IDEAS home Printed from https://ideas.repec.org/p/nod/wpaper/015.html
   My bibliography  Save this paper

Inflation Expectations and Readiness to Spend, Cross-Sectional Evidence

Author

Listed:
  • Eric R. Sims

    () (Department of Economics, University of Notre Dame)

Abstract

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 in?ation 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 in?ation 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 insigni?cant 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 in?ation 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 in?ation expectations in order to generate greater current spending.

Suggested Citation

  • Eric R. Sims, 2012. "Inflation Expectations and Readiness to Spend, Cross-Sectional Evidence," Working Papers 015, University of Notre Dame, Department of Economics, revised Mar 2012.
    • Handle: RePEc:nod:wpaper:015
    as

    Download full text from publisher

    File URL: http://www3.nd.edu/~tjohns20/RePEc/deendus/wpaper/015_expectations.pdf
    File Function: First version, 2012
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. S. Boragan Aruoba & Frank Schorfheide, 2011. "Sticky Prices versus Monetary Frictions: An Estimation of Policy Trade-Offs," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 60-90, January.
    2. 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.
    3. Bartosz Maćkowiak & Mirko Wiederholt, 2015. "Business Cycle Dynamics under Rational Inattention," Review of Economic Studies, Oxford University Press, vol. 82(4), pages 1502-1532.
    4. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, May.
    5. Carvalho, Carlos & Nechio, Fernanda, 2014. "Do people understand monetary policy?," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 108-123.
    6. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78-121.
    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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    inflation expectations; durable goods; survey data; ordered probit; zero lower bound; spending on cars and houses; control function approach;

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • 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

    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:nod:wpaper:015. 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: (Terence Johnson). General contact details of provider: http://edirc.repec.org/data/deendus.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 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.

    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.