Spend Today or Spend Tomorrow? The Role of Inflation Expectations in Consumer Behaviour

46 Pages Posted: 28 May 2020

Date Written: April 27, 2020

Abstract

This paper investigates whether Italian households’ actual expenditure and willingness to buy durables (cars) are related to their inflation expectations. In a high-inflation regime, as in the early 1990s, consumers with higher inflation expectations tend to have higher current than future expenditure, suggesting that an inter-temporal substitution mechanism is at work. Conversely, in a low-inflation environment, such as the one after the global financial crisis, higher expected inflation lowers households’ purchasing power and, thereby, spending (income effect). We also find that the composition of household balance sheets matters for explaining how inflation expectations shape spending behaviour.

Keywords: readiness to spend, intertemporal substitution effect, income effect, financial constraints

JEL Classification: D12, D84, E21, E31, E52

Suggested Citation

Rondinelli, Concetta and Zizza, Roberta, Spend Today or Spend Tomorrow? The Role of Inflation Expectations in Consumer Behaviour (April 27, 2020). Bank of Italy Temi di Discussione (Working Paper) No. 1276, Available at SSRN: https://ssrn.com/abstract=3612973 or http://dx.doi.org/10.2139/ssrn.3612973

Concetta Rondinelli (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Roberta Zizza

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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