Are Consumers' Spending Decisions in Line with A Euler Equation?

Lena Dräger and Giang Nghiem
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Giang Nghiem: Goethe-University Frankfurt am Main and Leibniz University

The Review of Economics and Statistics, 2021, vol. 103, issue 3, 580-596

Abstract: Evaluating a new survey of German consumers, we test whether individual consumption spending decisions are formed according to a Euler equation model. We find that consumers are more likely to increase current spending if they plan to increase spending in the future and if they expect higher inflation. In the subsample of financially literate households, we find an additional negative effect of nominal interest rate expectations. The effects of macroeconomic expectations become stronger if consumers observed news on monetary policy or financial markets. These news effects are particularly pronounced for consumers who save and those with low inflation forecast accuracy.

Date: 2021
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https://doi.org/10.1162/rest_a_00909
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Working Paper: Are Consumers’ Spending Decisions in Line With an Euler Equation? (2018)
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