The Hidden Heterogeneity of Inflation Expectations and its Implications

29 Pages Posted: 16 Jul 2020

See all articles by Lena Drager

Lena Drager

University of Hamburg

Michael J. Lamla

ETH Zurich - KOF Swiss Economic Institute; University of Essex

Damjan Pfajfar

Board of Governors of the Federal Reserve System

Date Written: July, 2020

Abstract

Using a new consumer survey dataset, we document a new dimension of heterogeneity in inflation expectations that has implications for consumption and saving decisions as well as monetary policy transmission. We show that German households with the same inflation expectations differently assess whether the level of expected inflation and of nominal interest rates is appropriate or too high/too low. The `hidden heterogeneity' in expectations stemming from these opinions is related to demographic characteristics and affects current and planned spending in addition to the Euler equation effect of the perceived real interest rate. Furthermore, these differences in opinions affect German households differently depending on whether they are renters or homeowners.

JEL Classification: D84, E31, E52, E58

Suggested Citation

Drager, Lena and Lamla, Michael J. and Pfajfar, Damjan, The Hidden Heterogeneity of Inflation Expectations and its Implications (July, 2020). FEDS Working Paper No. 2020-054, Available at SSRN: https://ssrn.com/abstract=3650560 or http://dx.doi.org/10.17016/FEDS.2020.054

Lena Drager (Contact Author)

University of Hamburg

Allende-Platz 1
Hamburg, 20146
Germany

Michael J. Lamla

ETH Zurich - KOF Swiss Economic Institute ( email )

Zurich
Switzerland

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Damjan Pfajfar

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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