Beyond the Headline: How Personal Exposure to Inflation Shapes the Financial Choices of Households

51 Pages Posted: 24 Feb 2023 Last revised: 1 Dec 2023

See all articles by Christoph Basten

Christoph Basten

University of Zurich; Swiss Finance Institute; CESifo (Center for Economic Studies and Ifo Institute)

Merike Kukk

Tallinn University of Technology; Bank of Estonia

Jan Toczynski

École Polytechnique Fédérale de Lausanne; University of Zurich

Date Written: November 30, 2023

Abstract

Using unique bank account level data from a period of volatile inflation in Estonia in 2005-11 and interactive fixed effect estimation, we find individual consumption to respond to personal inflation beyond the headline rate. Households are exposed to different inflation due to different consumption baskets. For each percentage point of higher personal inflation exposure, they increase consumption by 1.4%, and also increase stock market investments. These responses are consistent with backward-looking inflation expectations. They are financed with savings or borrowing, except when the household is liquidity-constrained or over-indebted. Extra demand when inflation is already high can make inflation persistent and dependent on its current
distribution.

Keywords: inflation heterogeneity, personal inflation exposure, consumption, borrowing, interactive fixed effects, intertemporal choices.

JEL Classification: D14, D15, E21, E31

Suggested Citation

Basten, Christoph and Kukk, Merike and Toczynski, Jan, Beyond the Headline: How Personal Exposure to Inflation Shapes the Financial Choices of Households (November 30, 2023). Swiss Finance Institute Research Paper No. 23-15, Available at SSRN: https://ssrn.com/abstract=4369620 or http://dx.doi.org/10.2139/ssrn.4369620

Christoph Basten (Contact Author)

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Swiss Finance Institute

c/o University of Geneva
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CH-1211 Geneva 4
Switzerland

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Merike Kukk

Tallinn University of Technology ( email )

Akadeemia tee 3
Tallinn, 12618
Estonia

Bank of Estonia ( email )

Estonia pst. 13
Tallinn
Estonia

HOME PAGE: http://www.eestipank.ee

Jan Toczynski

École Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900
Switzerland

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

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