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Dynamic asset allocation and consumption under inflation inequality: The impacts of inflation experiences and expectations

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  • Li, Shaoyu
  • Wei, Lijia
  • Xu, Zhiwei

Abstract

Differences in spending patterns and in price increases across goods and services lead to the unequal inflation experiences of households (called inflation inequality). These differences then cause disagreements in inflation expectations and eventually have a significant effect on households’ asset allocation and consumption decisions. The asset allocation model in this paper explains how inflation experiences affect household investment and consumption through corresponding inflation expectations, which are characterized by long-term expected inflation, the impact coefficient of the expected inflation and the correlation between expected inflation and the risky return. Using China's economic data, the empirical results show that significant differences in inflation expectation arise from income gap, regional inequality, different inflation measures and economic sector spending differences. Using the estimated coefficients, the calibration results have policy implications that households need more financing channels to resist inflation, especially in rural areas and in the raw material sector.

Suggested Citation

  • Li, Shaoyu & Wei, Lijia & Xu, Zhiwei, 2017. "Dynamic asset allocation and consumption under inflation inequality: The impacts of inflation experiences and expectations," Economic Modelling, Elsevier, vol. 61(C), pages 113-125.
  • Handle: RePEc:eee:ecmode:v:61:y:2017:i:c:p:113-125
    DOI: 10.1016/j.econmod.2016.11.013
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    Cited by:

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    4. Anwar, Cep Jandi, 2021. "Heterogeneity Effect of Central Bank Independence on Asset Prices: Evidence from Selected Developing Countries," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 55(2), pages 65-80.
    5. Xiaoyi Zhang & Junyi Guo, 2018. "The Role of Inflation-Indexed Bond in Optimal Management of Defined Contribution Pension Plan During the Decumulation Phase," Risks, MDPI, vol. 6(2), pages 1-16, March.
    6. Zunera Shaukat & Ahmad Shahzad, 2019. "Impact of Portfolio Strategies on Portfolio Performance and Risk," International Journal of Business Administration, International Journal of Business Administration, Sciedu Press, vol. 10(1), pages 73-86, January.
    7. Wei, Huaying & Guo, Rui & Sun, Honghao & Wang, Nan, 2021. "Household leverage and education expenditure: the role of household investment," Finance Research Letters, Elsevier, vol. 38(C).

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    More about this item

    Keywords

    Inflation inequality; Inflation expectations; Asset allocation; Consumption;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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