Working Paper: CEPR ID: DP14905
Authors: Philippe Andrade; Erwan Gautier; Eric Mengus
Abstract: We provide new survey evidence on how households’ inflation expectations matter for their spending. A large share of households expects prices to remain stable instead of increasing. Such a belief is linked to individual experience with non-durable goods frequently purchased. Households expecting stable prices have a lower propensity to buy durable goods than those expecting positive inflation. In contrast, differences across households expecting positive inflation are associated with insignificant differences in durable consumption decisions. That behavioral distortion limits the impact of household inflation expectations on aggregate demand compared to the standard New Keynesian model.
Keywords: inflation expectation; channel; heterogeneous beliefs; households; spending; stabilization policies
JEL Codes: D12; D84; E21; E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| households expecting stable prices (D19) | lower propensity to buy durable goods (D12) |
| inflation expectations (E31) | consumption behavior (D10) |
| positive inflation expectations (E31) | significant variations in durable consumption decisions (D15) |
| behavioral distortion (D91) | impact of inflation expectations on consumption (D12) |