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

50 Pages Posted: 16 Nov 2018

See all articles by Ioana Duca

Ioana Duca

European Central Bank (ECB)

Geoff Kenny

European Central Bank (ECB)

Andreas Reuter

European Union - European Commission

Date Written: November 14, 2018

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

Suggested Citation

Duca, Ioana and Kenny, Geoff and Reuter, Andreas, Inflation Expectations, Consumption and the Lower Bound: Micro Evidence from a Large Euro Area Survey (November 14, 2018). ECB Working Paper No. 2196. Available at SSRN: https://ssrn.com/abstract=3285079

Ioana Duca (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Geoff Kenny

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Andreas Reuter

European Union - European Commission ( email )

Belgium

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