Working Paper: NBER ID: w27399
Authors: Francesco Dacunto; Daniel Hoang; Michael Weber
Abstract: With a binding effective lower bound on interest rates and large government deficits, conventional policies are unviable and policymakers resort to unconventional policies, which target households' expectations directly. Using unique micro data and a difference-in-differences strategy, we assess the effectiveness of unconventional fiscal policy and forward guidance, both of which aim to stimulate consumption via raising households' inflation expectations. All households' inflation expectations and spending plans react to unconventional fiscal policy. Instead, households, contrary to experts, do not react to forward guidance. We argue that policies aiming to affect households directly are ineffective if (non-expert) households do not understand them.
Keywords: unconventional fiscal policy; forward guidance; household expectations; inflation expectations; consumption
JEL Codes: D12; D84; D91; E21; E31; E52; E65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Unconventional fiscal policy (VAT increase announcement) (E62) | Forward guidance announcements by the ECB (E60) |
| Unconventional fiscal policy (VAT increase announcement) (E62) | German households' willingness to purchase durable goods (D12) |
| Forward guidance announcements by the ECB (E60) | Households' inflation expectations (D19) |
| Forward guidance announcements by the ECB (E60) | Households' readiness to spend on durable goods (D12) |