• Feb 04
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  Thursday 4 February 2021, 11:00 AM

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Eric Mengus (HEC Paris) - What Matters in Households’ Inflation Expectations?

Co-authors: Phillipe Andrade (Federal Reserve Bank of Boston), Erwan Gautier (Banque de France)

Abstract

We provide new survey evidence on how households’ inflation expectations matter for their spending on durable goods. We highlight a new behavioral distortion that limits the inflation expectation channel compared to the standard New Keynesian setup. A large share of households expects prices to remain stable instead of increasing. Such a belief is driven by individual experiences with non-durable goods frequently purchased. Households expecting stable prices consume less durable goods than those expecting positive inflation. In contrast, differences in expectations across households expecting positive inflation are associated with insignificant differences in durable consumption. Such a distortion is also present among households who tend to have higher cognitive capacities or lower financial constraints. 

An economy plagued by a slump and in a liquidity trap has some options to exit the crisis. We discuss helicopter money and other equivalent policies that can reflate the economy and boost  consumption. Traditional helicopter money, via the joint co-operation between the treasury and the central bank, depends critically on the central bank fully guaranteeing treasury's debt. We explore some alternatives for the central bank to do helicopter money on its own, without any treasury's involvement.

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