Inflation Expectations, Consumption and the Lower Bound: Micro Evidence from a Large Euro Area Survey

Abstract

This paper exploits a very large multi-country survey of consumers to investigate empirically the relationship between inflation expectations and consumer spending. We document that for the Euro Area and almost all of its constituent countries this relationship is generally positive: a higher expected change in inflation is associated with an increase in the probability that a given consumer will make major purchases. Moreover, in line with the predictions of macroeconomic theory, the impact is stronger when the lower bound on nominal interest rates is binding. Also, using the estimated spending probabilities from our micro-level analysis, we indirectly estimate the impact of a gradual increase in inflation expectations on aggregate private consumption. We find the effects to be economically relevant, especially when the lower bound is binding.

Keywords: consumer inflation expectations, consumption, lower bound, micro data

JEL Classification: D12, D84, E21, E31, E52