DP14905 What Matters in Households' Inflation Expectations?
|Author(s):||Philippe Andrade, Erwan Gautier, Eric Mengus|
|Publication Date:||June 2020|
|Keyword(s):||adjustment costs, Euler Equation, imperfect information, Inflation expectations, Stabilization policies, survey data|
|JEL(s):||D12, D84, E21, E31, E52|
|Programme Areas:||Monetary Economics and Fluctuations|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=14905|
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.