How to limit the spillover from an inflation surge to inflation expectations?

authored by

Lena Dräger, Michael J. Lamla, Damjan Pfajfar

Abstract

Using a randomized control trial on German consumers we show that information about rising inflation increases inflation expectations. This initial increase in expectations can be mitigated by providing forecasts of inflation. Information about (future) inflation affects the whole term structure of inflation expectations, where the effects are smaller for longer-run expectations. This information also causes changes in consumption and savings decisions. In subsequent months—when consumers realize that inflation is much higher than the provided forecasts—they reverse the reliance on information about inflation forecasts and rely again more on their initial priors.

Organisation(s)

Institute of Monetary Economics

External Organisation(s)

Munich Society for the Promotion of Economic Research - CESifo GmbH
University of Duisburg-Essen
ETH Zurich
Federal Reserve Bank

Type

Article

Journal

Journal of Monetary Economics

Volume

144

ISSN

0304-3932

Publication date

05.2024

Publication status

Published

Peer reviewed

Yes

ASJC Scopus subject areas

Finance, Economics and Econometrics

Electronic version(s)

https://www.econstor.eu/handle/10419/264090 (Access: Open)
https://doi.org/10.1016/j.jmoneco.2023.12.004 (Access: Closed)