Understanding Expectations Formation for Hand-to-Mouth Households: Lessons from the Financial Crisis

Tufan Ekici, Martin Geiger and Marios Zachariadis

University of Cyprus Working Papers in Economics from University of Cyprus Department of Economics

Abstract: We study how poor hand-to-mouth and wealthy hand-to-mouth households form their expectations as compared to wealthy liquid households in the United States, using monthly microeconomic survey data for the period from 2005:2 to 2013:6. Utilizing a timeline of financial crisis events along with changes in stock-market values and uncertainty around those events, we assess the responses of these households’ expectations regarding inflation, unemployment, and the interest rate. Our estimates imply differences in the formation of expectations for liquidity constrained households relative to unconstrained ones. While adverse financial crisis events that lower future inflation do not affect inflation expectations for all households, wealthy hand-to-mouth households tend to revise their inflation expectations downwards substantially. This suggests they decipher these financial events’ noisy signal regarding lower future inflation more accurately than other types of households, in line with having a greater incentive to do so.

Keywords: liquidity constraints; inflation expectations; unemployment expectations; interest rate expectations; financial shocks (search for similar items in EconPapers)
JEL-codes: D84 E30 E70 G01 G51 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2024-08-19, Revised 2024-11-05
New Economics Papers: this item is included in nep-fdg and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:ucy:cypeua:05-2024

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