Working Paper: CEPR ID: DP14557
Authors: Luigi Paciello; Claudio Michelacci
Abstract: Using the Bank of England Inflation Attitudes Survey we find that households with preferences for higher inflation and higher interest rates have lower expected inflation. The wedge is mildly correlated with existing measures of uncertainty and increases after major economic events such as the failure of Lehman Brothers or the Brexit referendum. We interpret the wedge as due to Knightian uncertainty about future monetary policy and the underlying economic environment. If households had treated uncertainty as measurable risk, consumption and output would have been around 1 percent higher both during the Great Recession and in recent years.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| preferences about inflation and interest rates (E43) | consumption and output (E20) |
| wealth (D14) | preferences about inflation and interest rates (E43) |
| preferences for higher inflation (E31) | expected inflation (E31) |
| preferences about inflation and interest rates (E43) | expected inflation (E31) |
| financial positions (G32) | preferences about inflation and interest rates (E43) |