Inflation disasters and consumption.

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Date: July 2022
Publisher: Elsevier B.V.
Document Type: Report; Brief article
Length: 229 words

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Abstract :

Keywords Inflation expectations; Expected consumption; Issuance costs; Tail risk Highlights * Perceived inflation risks are associated with higher real consumption growth and increased propensity to purchase durables. * Rare inflation disasters produce greater inflation uncertainty and higher credit costs. * Inflation expectations affect consumption beyond their direct effect on the Fisher Relation. * Consumers anticipate other macroeconomic outcomes to accompany inflation with implications for consumption-savings plans. Abstract Consumers with longer-tailed subjective probability distributions of inflation anticipate lower real consumption growth and are more favorably inclined to purchasing durable goods. I propose a model in which rare inflation disasters increase the cost of future credit by raising debt issuance costs, prompting consumers to stock up on debt and move purchases to the present. Consistent with this theory, consumers with longer-tailed distributions anticipate higher future interest rates. The effects of anticipated tail risks on consumption plans are more pronounced among credit market participants. Author Affiliation: Wake Forest University, Box 7505, Winston-Salem NC 27109, USA Article History: Received 23 November 2021; Revised 28 February 2022; Accepted 2 March 2022 (footnote)[white star] I thank the editor and anonymous referee, as well as Jeffrey Campbell, Amanda Griffith, Benjamin Pugsley, Eric Sims, seminar participants at the University of Notre Dame and conference participants at the joint European Central Bank - Federal Reserve Bank of New York Conference on Expectations Surveys. Byline: Jane M. Ryngaert [jane.ryngaert@utexas.edu]

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Source Citation   

Gale Document Number: GALE|A708650507