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  5. Inflation: Expectations, Perceptions, and Beliefs
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Inflation: Expectations, Perceptions, and Beliefs

Paper Session

Friday, Jan. 3, 2025 8:00 AM - 10:00 AM (PST)

Hilton San Francisco Union Square, Golden Gate 7&8
Hosted By: American Economic Association
  • Chair: Nicolas Magud, International Monetary Fund

Inflated Concerns: Exposure to Past Inflationary Episodes and Preferences for Price Stability

Nicolas Magud
,
International Monetary Fund
Samuel Pienknagura
,
International Monetary Fund

Abstract

Using individual-level survey data for both advanced economies and emerging markets spanning over 45 years for 42 countries, we show that cohorts who have had higher exposure to past inflationary episodes (levels, as well as to more persistent or to more volatile inflation), systematically express higher concerns over rising prices. The link between past high inflation exposure and expressed concerns over price stability is particularly strong when an individual’s exposure occurs in the latter part of her working-age (as in lifecycle theory). The impact of past exposure to high inflation on contemporaneous preferences over price stability increases when surveyed in the midst of high ongoing inflation and with macroeconomic instability (as measured by GDP growth volatility), but diminishes with the quality of institutions.

The Long-term Effects of Inflation on Inflation Expectations

Michael Weber
,
University of Chicago
Fabio Braggion
,
Tilburg University
Nic Schaub
,
WHU-Otto Beisheim School of Management
Felix von Meyerinck
,
University of Zurich

Abstract

We study the long-term effects of inflation surges on inflation expectations. German households living in areas with higher local inflation during the hyperinflation of the 1920s expect higher inflation today, after partialling out determinants of historical inflation and current inflation expectations. Our evidence points towards transmission of inflation experiences from parents to children and through collective memory. Differential historical inflation also modulates the updating of expectations to current inflation, the response to economic policies affecting inflation, and financial decisions. We obtain similar results for Polish households residing in formerly German areas. Overall, our findings are consistent with inflationary shocks having a long-lasting impact on attitudes towards inflation.

Partisan Trust in the Federal Reserve

Carola Binder
,
University of Texas-Austin
Abhiprerna Smit
,
William and Mary
Cody Couture
,
Hamilton College

Abstract

This paper examines the perception of the public towards the Federal Reserve. Trust in the central bank depends on political partisanship, and is highest for respondents of the same party as the President. Independents tend to have the lowest trust, though in recent years, members of the opposition party have the lowest trust. Partisan effects are larger than other demographic differences in trust. However, controlling for central bank trust only slightly moderates the partisan gap in inflation expectations. We conduct a new survey-based information experiment before and after the Presidential inauguration in 2025 to study the reasons for partisan differences in trust and the effects of information about central bank independence on trust and expectations.

Coauthors: Cody Couture and Abhiprerna Smit

What Explains the Consumption Decisions of Low-Income Households?

Ulrike Malmendier
,
University of California-Berkeley
Sasha Indarte
,
University of Pennsylvania
Raymond Kluender
,
Harvard Business School
Michael Stepner
,
University of Toronto

Abstract

A variety of distortions, such as financial constraints and behavioral biases, have been proposed to explain deviations from canonical consumption-savings models. We develop a new sufficient statistics approach to measure the impact of such distortions on consumption as a wedge between actual consumption and a counterfactual ”frictionless” consumption. We calculate these wedges for a population of predominantly low-income US consumers using a new survey of economic beliefs linked to bank account transactions data. We find that consumption choices are significantly distorted both upwards and downwards. The median wedge is 40% of frictionless consumption in absolute value, with 51% having negative wedges (underconsuming) and 49% having positive wedges (over-consuming). Because alternative models of distortions imply different properties of wedges, estimates of wedges can be used as a diagnostic to distinguish between models. Notably, financial constraints only generate negative wedges, indicating that additional or alternative distortions (such as present bias or consumer inertia) are necessary to rationalize the consumption decisions of low-income households.

Discussant(s)
Sebnem Kalemli-Ozcan
,
University of Maryland
Laura Alfaro
,
Harvard Business School
Mark Spiegel
,
Federal Reserve Bank of San Francisco
Martin Uribe
,
Columbia University
JEL Classifications
  • E7 - Macro-Based Behavioral Economics
  • E3 - Prices, Business Fluctuations, and Cycles