Are Consumers Planning Consumption According to an Euler Equation?

Evaluating a new survey dataset of German consumers, we test whether individual consumption plans are formed according to an Euler equation derived from consumption life-cycle models. Estimating several consumption Euler equations, the results are mostly in line with the theory: We ?nd evidence of consumption smoothing, since individual current and planned spending are positively correlated. In addition, current spending is positively correlated with both quantitative and qualitative in?ation expectations, and negatively with quantitative nominal interest rate expectations. Overall, this results in a negative link between current spending and implied real interest rate expectations, where the weaker e?ect of nominal interest rate expectations might be due to the current zero-lower-bound environment. As expected, the e?ect of perceived real interest rates is most pronounced for consumers’ who are active on ?nancial markets. Finally, economic news on in?ation and ?nancial market developments observed by the consumer strengthen the e?ects of their interest rate and in?ation expectations on current spending.