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Can consumers’ inflation expectations help stabilise the economy?

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  • Kenny, Geoff
  • Duca, Ioana

Abstract

Economists have argued that when interest rates set by policymakers cannot go any lower, the economy can be stabilised if consumers expect the rate of inflation to increase. Yet, the evidence for this stabilising effect has been very mixed. In this article we review new evidence from a monthly survey of over 25,000 individual consumers across the euro area showing that consumers are indeed more ready to spend if they expect inflation to be higher in the future. While generalised in the population, the stabilising effect is stronger when nominal interest rates are constrained at the lower bound. JEL Classification: D12, D84, E21, E31, E52

Suggested Citation

  • Kenny, Geoff & Duca, Ioana, 2021. "Can consumers’ inflation expectations help stabilise the economy?," Research Bulletin, European Central Bank, vol. 79.
    • Handle: RePEc:ecb:ecbrbu:2021:0079:
    Note: 339061
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    References listed on IDEAS

    as
    1. Olivier Coibion & Dimitris Georgarakos & Yuriy Gorodnichenko & Maarten van Rooij, 2023. "How Does Consumption Respond to News about Inflation? Field Evidence from a Randomized Control Trial," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(3), pages 109-152, July.
    2. Rüdiger Bachmann & Tim O. Berg & Eric R. Sims, 2015. "Inflation Expectations and Readiness to Spend: Cross-Sectional Evidence," American Economic Journal: Economic Policy, American Economic Association, vol. 7(1), pages 1-35, February.
    3. Rodolfo Arioli & Colm Bates & Heinz Dieden & Ioana Duca & Roberta Friz & Christian Gayer & Geoff Kenny & Aidan Meyler & Iskra Pavlova, 2016. "EU Consumers’ Quantitative Inflation Perceptions and Expectations: An Evaluation," European Economy - Discussion Papers 038, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    4. Andrew Haldane & Michael McMahon, 2018. "Central Bank Communications and the General Public," AEA Papers and Proceedings, American Economic Association, vol. 108, pages 578-583, May.
    5. Bernardo Candia & Olivier Coibion & Yuriy Gorodnichenko, 2020. "Communication and the Beliefs of Economic Agents," NBER Working Papers 27800, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Consumption; Inflation expectations; Lower Bound on Nominal Interest Rates;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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