Inflation Expectations and Readiness to Spend, Cross-Sectional Evidence
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.
|Date of creation:||Mar 2012|
|Date of revision:||Mar 2012|
|Contact details of provider:|| Postal: 434 Flanner Hall, Notre Dame, IN 46556|
Phone: (574) 631-7698
Web page: http://economics.nd.edu
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- 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.
- S. Boragan Aruoba & Frank Schorfheide, 2009. "Sticky prices versus monetary frictions: an estimation of policy trade-offs," Working Papers 09-8, Federal Reserve Bank of Philadelphia.
- 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.
- Olivier Coibion & Yuriy Gorodnichenko, 2008. "What Can Survey Forecasts Tell Us About Informational Rigidities?," NBER Working Papers 14586, National Bureau of Economic Research, Inc.
- Yuriy Gorodnichenko & Olivier Coibion, 2010. "What can survey forecasts tell us about informational rigidities?," 2010 Meeting Papers 277, Society for Economic Dynamics.
- Bartosz Mackowiak & Mirko Wiederholt, 2008. "Business Cycle Dynamics under Rational Inattention," 2008 Meeting Papers 1059, Society for Economic Dynamics.
- Maćkowiak, Bartosz & Wiederholt, Mirko, 2011. "Business cycle dynamics under rational inattention," Working Paper Series 1331, European Central Bank.
- Mackowiak, Bartosz Adam & Wiederholt, Mirko, 2010. "Business Cycle Dynamics under Rational Inattention," CEPR Discussion Papers 7691, C.E.P.R. Discussion Papers.
- Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, 05.
- Nicholas Bloom, 2007. "The Impact of Uncertainty Shocks," NBER Working Papers 13385, National Bureau of Economic Research, Inc.
- Carvalho, Carlos & Nechio, Fernanda, 2014. "Do people understand monetary policy?," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 108-123.
- Fernanda Nechio & Carlos Carvalho, 2012. "Do People Understand Monetary Policy?," 2012 Meeting Papers 426, Society for Economic Dynamics.
- Carlos Carvalho & Fernanda Nechio, 2013. "Do People Understand Monetary Policy?," Textos para discussão 618, Department of Economics PUC-Rio (Brazil).
- Carlos Carvalho & Fernanda Nechio, 2012. "Do people undestand monetary policy?," Working Paper Series 2012-01, Federal Reserve Bank of San Francisco.
- 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.
- Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2009. "When is the government spending multiplier large?," NBER Working Papers 15394, National Bureau of Economic Research, Inc.
- Lawrence J. Christiano & Martin Eichenbaum & Sergio Rebelo, 2010. "When is the government spending multiplier large?," FRB Atlanta CQER Working Paper 2010-01, Federal Reserve Bank of Atlanta.
- Gabaix, Xavier, 2012. "Boundedly Rational Dynamic Programming: Some Preliminary Results," CEPR Discussion Papers 8813, C.E.P.R. Discussion Papers.
- Xavier Gabaix, 2012. "Boundedly Rational Dynamic Programming: Some Preliminary Results," NBER Working Papers 17783, National Bureau of Economic Research, Inc.
- 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)
This item is featured on the following reading lists or Wikipedia pages:
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)
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 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.