Citation

Discussion Paper Details

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Title: What Matters in Households' Inflation Expectations?

Author(s): Philippe Andrade, Erwan Gautier and Eric Mengus

Publication Date: June 2020

Keyword(s): adjustment costs, Euler Equation, imperfect information, Inflation expectations, Stabilization policies and survey data

Programme Area(s): Monetary Economics and Fluctuations

Abstract: We provide evidence that households discretize their inflation expectations so that what matters for durable consumption decisions is the broad inflation regime they expect. Using survey data, we document that a large share of the adjustment in the average inflation expectation comes from the change in the share of households expecting stable prices; these households also consume relatively less than the ones expecting positive inflation. In contrast, variations of expectations across households expecting a positive inflation rate are associated with much smaller differences in individual durable consumption choices. We illustrate how this mitigates the expectation channel of monetary policy.

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Bibliographic Reference

Andrade, P, Gautier, E and Mengus, E. 2020. 'What Matters in Households' Inflation Expectations?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14905