Inflation Beliefs
Michael Weber, Associate Professor of Finance
This project investigates how households form inflation expectations, how they update inflation expectations, and whether they align their spending patterns with predictions from economic theory. Since policymakers reduced interest rates to zero during the Great Recession, there has been growing interest in better understanding and utilizing expansionary policies that operate through their effects on expectations. Forward guidance by the Fed, for example, or the Bank of Japan’s commitment to generate positive inflation were supposed to convince people that inflation would be higher in the future and therefore that real interest rates should be lower, thereby raising incentives for households to consume more today. But whether this channel works at all, or sufficiently well, remains a point of contention. We propose to address this central question in macroeconomics by combining in a novel and unprecedented fashion three tools: scanner-level data, household surveys, and experimen- tal methods. Scanner-level data (from AC Nielsen Homescan) will allow us to track the spending of tens of thousands of households on a daily basis. Surveys of participating households will enable us to measure the expectations of consumers, and especially their inflation expectations, directly. Finally, we will utilize experimental methods, namely the provision of information to randomized subsets of households, to engineer exogenous variation in the beliefs of some consumers.