The Causal Effects of Inflation Uncertainty on Households' Beliefs and Actions

Dimitris Georgarakos, Yuriy Gorodnichenko, Olivier Coibion and Geoff Kenny

No 17317, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We implement a survey-based randomized information treatment that generates independent variation in the inflation expectations and the uncertainty about future inflation of European households. This variation allows us to assess how both first and second moments of inflation expectations separately affect subsequent household decisions. We document several key findings. First, higher inflation uncertainty leads households to reduce their subsequent durable goods purchases for several months, while a higher expected level of inflation increases them. Second, an increase in uncertainty about inflation induces households to tilt their portfolios towards safe and away from riskier asset holdings. Third, higher inflation uncertainty encourages household job search, leading to higher subsequent employment among the unemployed and less under-employment among the employed. Finally, we document that the level of inflation expectations has a different effect from uncertainty in inflation expectations and thus it is crucial to take into account both to measure their separate effects on decisions.

Keywords: inflation uncertainty; consumption; household finance; labor supply; consumer expectations survey (search for similar items in EconPapers)
JEL-codes: C83 D84 E31 G51 (search for similar items in EconPapers)
Pages: 71 pages
Date: 2024-09
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eur and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: The Causal Effects of Inflation Uncertainty on Households' Beliefs and Actions (2024)
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