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The Hidden Heterogeneity of Inflation and Interest Rate Expectations: The Role of Preferences

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  • Dräger, Lena
  • Lamla, Michael J.
  • Pfajfar, Damjan

Abstract

We study consumers' preferences on expected inflation and interest rates. Preferences are measured by asking survey respondents whether they view the expected levels of inflation or interest rates as appropriate for the economy, or whether they would prefer higher or lower levels. For a given level of expectations, we observe substantial heterogeneity in these macroeconomic preferences: Consumers with the same inflation or interest rate expectations can differently assess whether they view this level as appropriate for the economy, or not. However, the ratio of those who think inflation is reasonable is the highest for the group that expects inflation rate of about 1\%. The relationship between preferences and underlying expectations remains remarkably robust across different inflation regimes. Overall, macroeconomic preferences co-vary with socio-demographic characteristics like income and education, but are not related to individuals' net wealth position. They correlate with risk preferences and with trust in the central bank: More risk-loving respondents or those with strong trust in the ECB's ability to realize price stability are less likely to prefer lower inflation or higher interest rates than the expected levels.

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  • Dräger, Lena & Lamla, Michael J. & Pfajfar, Damjan, 2020. "The Hidden Heterogeneity of Inflation and Interest Rate Expectations: The Role of Preferences," Hannover Economic Papers (HEP) dp-666, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät, revised Feb 2023.
  • Handle: RePEc:han:dpaper:dp-666
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    Cited by:

    1. Gabriele Galati & Richhild Moessner & Maarten van Rooij, 2023. "The anchoring of long-term inflation expectations of consumers: insights from a new survey," Oxford Economic Papers, Oxford University Press, vol. 75(1), pages 96-116.
    2. Andrade, Philippe & Gautier, Erwan & Mengus, Eric, 2023. "What matters in households’ inflation expectations?," Journal of Monetary Economics, Elsevier, vol. 138(C), pages 50-68.
    3. Lena Dräger & Michael J. Lamla, 2024. "Consumers' macroeconomic expectations," Journal of Economic Surveys, Wiley Blackwell, vol. 38(2), pages 427-451, April.
    4. Dräger, Lena, 2023. "Central Bank Communication with the General Public," Hannover Economic Papers (HEP) dp-713, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.

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    More about this item

    Keywords

    Macroeconomic expectations; monetary policy perceptions; inflation and interest rate preferences; risk preferences; survey microdata;
    All these keywords.

    JEL classification:

    • 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
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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