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
Date Written: November 30, 2023
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
Keywords: inflation heterogeneity, personal inflation exposure, consumption, borrowing, interactive fixed effects, intertemporal choices.
JEL Classification: D14, D15, E21, E31
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