Economic policy uncertainty and inflation expectations of the households – insights from survey data

Debasis Rooj, Anurag Banerjee and Reshmi Sengupta

Indian Growth and Development Review, 2025, vol. 18, issue 2-3, 133-157

Abstract: PurposeThis paper aims to analyze how economic policy uncertainty (EPU) affects inflation expectations. The study uses unit-level observations of 3 months ahead and 1-year ahead inflation expectations from the Reserve Bank of India’s Inflation Expectations Household Survey (IESH) to explore the variations in consumer confidence across several cities in India.Design/methodology/approachThis paper uses unit-level observations of 3 months ahead and 1 year-ahead inflation expectations of the households from the Reserve Bank of India’s IEHS between September 2008 to July 2024. It uses a fixed effects regression exercise to examine the impact of EPU on the households’ inflation expectations.FindingsThe study results show that EPU negatively and significantly impacts consumers’ short-term inflation expectations. Heterogenous analysis concerning gender reveals that impact of EPU on inflation expectations is higher for women than men. Further, respondents in the working-age population and greater income uncertainty are more sensitive to changes in EPU on inflation expectations. A disaggregated analysis is also conducted to analyze the impact of EPU on several disaggregated indicators of inflation expectations, showing that EPU has a larger impact on durables and house prices compared to nondurables and services. Robustness tests with alternative policy uncertainty measures and placebo tests corroborate our findings.Practical implicationsThese findings indicate that EPU can potentially depress the household’s own price expectations related to several components of their consumption basket due to precautionary saving behavior, consequently leading to a pessimistic view of overall prices.Originality/valueTo the best of our knowledge, no study has explored the impact of inflation policy uncertainty on inflation expectations using unit-level survey data for an emerging economy like India. Furthermore, survey-level data allows us to examine the heterogenous impact of EPU based on household characteristics. Moreover, it also establishes the household’s own consumption basket channel through which EPU impacts the overall inflation expectations.

Keywords: Economic policy uncertainty; Inflation expectations; Households; RBI; India (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.emerald.com/igdr/article/18/2-3/133/12 ... tainty-and-inflation (text/html)
https://www.emerald.com/igdr/article-pdf/18/2-3/13 ... r-05-2024-0062en.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:igdrpp:igdr-05-2024-0062

DOI: 10.1108/IGDR-05-2024-0062

Access Statistics for this article

Indian Growth and Development Review is currently edited by Professor Chetan Ghate, Professor Prabal Chowdhury and Professor Prabal Chowdhury

More articles in Indian Growth and Development Review from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().