Fiscal Policy and Households' Inflation Expectations: Evidence from a Randomized Control Trial

56 Pages Posted: 22 Feb 2021

See all articles by Olivier Coibion

Olivier Coibion

University of Texas at Austin

Yuriy Gorodnichenko

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Michael Weber

University of Chicago - Finance; National Bureau of Economic Research (NBER)

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Abstract

Rising government debt levels around the world are raising the specter that authorities might seek to inflate away the debt. In theoretical settings where fiscal policy "dominates" monetary policy, higher debt without offsetting changes in primary surpluses should lead households to anticipate this higher inflation. Are household inflation expectations sensitive to fiscal considerations in practice? We field a large randomized control trial on U.S. households to address this question by providing randomly chosen subsets of households with information treatments about the fiscal outlook and then observing how they revise their expectations about future inflation as well as taxes and government spending. We find that information about the current debt or deficit levels has little impact on inflation expectations but that news about future debt leads them to anticipate higher inflation, both in the short run and long run. News about rising debt also induces households to anticipate rising spending and a higher rate of interest for government debt.

JEL Classification: E31, C83, D84

Suggested Citation

Coibion, Olivier and Gorodnichenko, Yuriy and Weber, Michael, Fiscal Policy and Households' Inflation Expectations: Evidence from a Randomized Control Trial. IZA Discussion Paper No. 14114, Available at SSRN: https://ssrn.com/abstract=3789381

Olivier Coibion (Contact Author)

University of Texas at Austin ( email )

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Austin, TX 78712
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Yuriy Gorodnichenko

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

HOME PAGE: http://www.econ.berkeley.edu/~ygorodni/index.htm

National Bureau of Economic Research (NBER)

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IZA Institute of Labor Economics

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Michael Weber

University of Chicago - Finance ( email )

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Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

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United States

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