The Hidden Heterogeneity of Inflation and Interest Rate Expectations: The Role of Preferences

26 Pages Posted: 7 Apr 2022

See all articles by Lena Dräger

Lena Dräger

Leibniz University Hannover

Michael J. Lamla

Leuphana University of Lueneburg

Damjan Pfajfar

Federal Reserve Bank of Cleveland

Date Written: 2022

Abstract

We study consumers’ preferences on expected inflation and interest rates. Preferences are measured by asking survey respondents whether they view the expected levels of inflation or interest rates as appropriate for the economy, or whether they would prefer higher or lower levels. For a given level of expectations, we observe substantial heterogeneity in these macroeconomic preferences: Consumers with the same inflation or interest rate expectations can differently assess whether they view this level as appropriate for the economy, or not. However, the ratio of those who think inflation is reasonable is the highest for the group that expects inflation rate of about 1%. The relationship between preferences and underlying expectations remains remarkably robust across different inflation regimes. Overall, macroeconomic preferences co-vary with sociodemographic characteristics like income and education, but are not related to individuals’ net wealth position. They correlate with risk preferences and with trust in the central bank: More risk-loving respondents or those with strong trust in the ECB’s ability to realize price stability are less likely to prefer lower inflation or higher interest rates than the expected levels.

Keywords: macroeconomic expectations, monetary policy perceptions, inflation and interest rate preferences, risk preferences, survey microdata

JEL Classification: E310, E520, E580, D840

Suggested Citation

Dräger, Lena and Lamla, Michael J. and Pfajfar, Damjan, The Hidden Heterogeneity of Inflation and Interest Rate Expectations: The Role of Preferences (2022). CESifo Working Paper No. 9637, Available at SSRN: https://ssrn.com/abstract=4069203 or http://dx.doi.org/10.2139/ssrn.4069203

Lena Dräger (Contact Author)

Leibniz University Hannover ( email )

Königsworther Platz 1
Hannover, 30167
Germany

Michael J. Lamla

Leuphana University of Lueneburg ( email )

Scharnhorststraße 1
Wilschenbrucher Weg 69
Lüneburg, 21335
Germany

Damjan Pfajfar

Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

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