Inflation Expectations and Consumer Spending: The Role of Household Balance Sheets

30 Pages Posted: 5 Mar 2019 Last revised: 4 Mar 2020

See all articles by Lenard Lieb

Lenard Lieb

Maastricht University; Maastricht University

Johannes Schuffels

Maastricht University - School of Business and Economics

Date Written: February 14, 2019

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.

Keywords: Consumption, Wealth, Inflation, Expectations, Monetary Policy

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

Suggested Citation

Lieb, Lenard and Schuffels, Johannes, Inflation Expectations and Consumer Spending: The Role of Household Balance Sheets (February 14, 2019). Available at SSRN: https://ssrn.com/abstract=3334339 or http://dx.doi.org/10.2139/ssrn.3334339

Lenard Lieb

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

Johannes Schuffels (Contact Author)

Maastricht University - School of Business and Economics ( email )

Netherlands

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