Beyond the Headline: How Personal Inflation Exposure Shapes Households’ Financial Choices

Christoph Basten, Merike Kukk and Jan Toczynski
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Jan Toczynski: University of Zurich and Swiss Finance Institute

No 23-15, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Using unique account-level data from a high inflation period in Estonia in 2005-11 and interactive fixed effect estimation, we find individual consumption to depend on personal beyond national headline inflation. Foreign shocks to selected goods’ inflation affect disproportionately households with greater consumption basket weights on these goods and make them increase consumption by an extra 1.3% per percentage point of higher inflation exposure, financed with more net borrowing. Indebted households respond stronger, consistent with a debt depreciation effect. Resulting extra demand for goods with higher inflation can reinforce inflation, letting future inflation depend on its current distribution.

Keywords: inflation heterogeneity; personal inflation exposure; consumption; borrowing; interactive fixed effects; intertemporal choices. (search for similar items in EconPapers)
JEL-codes: D14 D15 E21 E31 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2023-02
New Economics Papers: this item is included in nep-ban and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2315

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