Inflation expectations and consumer spending: the role of household balance sheets (RM/19/022-revised-)

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Abstract

Research interest in the reaction of consumption to expected inflation has increased in recent years due to efforts by central banks to kick-start demand by steering inflation expectations. We contribute to this literature by analysing whether various components of households’ balance sheets determine
how consumption reacts to expected inflation. Two channels in particular are conceivable: an increase in inflation expectations can raise consumption through direct increases in expected real wealth, e.g. for households with nominal financial liabilities. By affecting the real interest rate, expected inflation
can interact with wealth if only those households can adapt their consumption to current real interest rates that are not budget constrained or sufficiently liquid to shift funds between consumption and savings. We investigate these channels empirically using household-level information on balance sheets, durable consumption, and inflation expectations from the Dutch Central Bank’s Household Survey. We find that household net worth moderates the relation between expected inflation and durable spending decisions. This effect is particularly strong for households with fixed interest rate mortgages.
Original languageEnglish
PublisherMaastricht University, Graduate School of Business and Economics
Number of pages31
DOIs
Publication statusPublished - 2 Mar 2020

Publication series

SeriesGSBE Research Memoranda
Number006

JEL classifications

  • d84 - "Expectations; Speculations"
  • e31 - "Price Level; Inflation; Deflation"
  • e21 - "Macroeconomics: Consumption; Saving; Wealth"

Keywords

  • intertemporal household choice
  • expectations
  • consumption
  • macro-based behavioral economics

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