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  • 1
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    Munich: Center for Economic Studies and Ifo Institute (CESifo)
    Publication Date: 2019-12-04
    Description: The empirical effectiveness of economic policies that operate theoretically through similar channels differs substantially. We document this fact by comparing an easy-to-grasp expectations-based policy, unconventional fiscal policy, with a policy whose implications are harder to understand by non-expert consumers, forward guidance. Both policies aim to stimulate consumption via managing inflation expectations based on the Euler equation. Unconventional fiscal policy uses trivial announcements of future consumer-price increases to boost inflation expectations and consumption expenditure on impact. Instead, forward guidance requires that agents understand the inflationary effects of future low interest rates to increase their inflation expectations and spending today. We find households’ inflation expectations and readiness to spend react substantially to unconventional fiscal policy announcements. The reaction is homogeneous across households with different levels of sophistication. Instead, households do not react after forward guidance announcements. These results support recent work stressing the importance of limited cognition for the effectiveness of policies.
    Keywords: D12 ; D84 ; D91 ; E21 ; E31 ; E32 ; E52 ; E65 ; ddc:330 ; expectations ; natural experiments ; consumption ; fiscal policy ; monetary policy ; macroeconomics with micro data
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
    Language: English
    Type: doc-type:workingPaper
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  • 2
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    Munich: Center for Economic Studies and Ifo Institute (CESifo)
    Publication Date: 2018-02-23
    Description: Unconventional fiscal policy uses announcements of future increases in consumption taxes to generate inflation expectations and accelerate consumption expenditure. It is budget neutral and time consistent. We provide preliminary evidence for the effectiveness of such policies using changes in value-added tax (VAT) and household survey data for Poland. We find households increased their inflation expectations and willingness to purchase durables before the increase in VAT. Future research has to ensure income, wealth effects, or intratemporal substitution channels cannot explain these results and ideally exploit exogenous variation in VAT in a fixed nominal interest rate environment.
    Keywords: D12 ; D84 ; D91 ; E21 ; E31 ; E32 ; E52 ; E65 ; ddc:330
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
    Language: English
    Type: doc-type:workingPaper
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  • 3
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    Munich: Center for Economic Studies and Ifo Institute (CESifo)
    Publication Date: 2016-04-16
    Description: Unconventional fiscal policies incentivize households to accelerate consumption by generating future consumer price ination, and offer an alternative to unconventional monetary policy (Correia et al. (2013)). We use a natural experiment to study the causal effect of unconventional fiscal policies on consumption expenditure via the inflation-expectations channel. The German administration unexpectedly announced in November 2005 a three-percentage-point increase in value-added tax (VAT) effective in 2007. This shock increased German households’ inflation expectations during 2006, as well as actual inflation in 2007. Matched households in other European countries serve as counterfactuals in a difference-in-differences identification design. German households’ willingness to purchase durable goods increased by 34% after the shock, compared to matched foreign households. Income or wealth effects do not appear to drive these results, and we do not find evidence of intratemporal substitution from non-durable to durable consumption.
    Keywords: D12 ; D84 ; D91 ; E21 ; E31 ; E32 ; E52 ; E65 ; ddc:330 ; durable consumption ; zero lower bound ; fiscal and monetary policy ; survey data
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
    Language: English
    Type: doc-type:workingPaper
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  • 4
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    Munich: Center for Economic Studies and Ifo Institute (CESifo)
    Publication Date: 2016-11-05
    Description: Unconventional fiscal policy uses announcements of future increases in consumption taxes to generate inflation expectations and accelerate consumption expenditure. It is budget neutral and time consistent. We exploit a unique natural experiment for an empirical test of the effectiveness of unconventional fiscal policy. To comply with European Union law, the German government announced in November 2005 an unexpected 3-percentage-point increase in value-added tax (VAT), effective in 2007. The shock increased households' inflation expectations during 2006 and actual inflation in 2007. Germans' willingness to purchase durables increased by 34% after the shock, compared to before and to matched households in other European countries not exposed to the VAT shock. Income, wealth effects, or intratemporal substitution cannot explain these results.
    Keywords: D12 ; D84 ; D91 ; E21 ; E31 ; E32 ; E52 ; E65 ; ddc:330 ; zero-lower bound ; fiscal and monetary policy ; durable consumption ; survey data
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
    Language: English
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  • 5
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    Munich: Center for Economic Studies and Ifo Institute (CESifo)
    Publication Date: 2019-12-04
    Description: We show that, to form aggregate inflation expectations, consumers rely on the price changes they face in their daily lives while grocery shopping. Specifically, the frequency and size of price changes, rather than their expenditure share, matter for individuals’ inflation expectations. To document these facts, we collect novel micro data for a representative US sample that uniquely match individual expectations, detailed information about consumption bundles, and item-level prices. Our results suggest that the frequency and size of grocery-price changes to which consumers are personally exposed should be incorporated in models of expectations formation. Central banks' focus on core inflation - which excludes grocery prices - to design expectations-based policies might lead to systematic mistakes.
    Keywords: C90 ; D14 ; D84 ; E31 ; E52 ; E71 ; G11 ; ddc:330 ; beliefs formation ; rational inattention ; realized inflation ; transmission of monetary policy
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
    Language: English
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  • 6
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    Munich: Center for Economic Studies and Ifo Institute (CESifo)
    Publication Date: 2020-04-30
    Description: Expectations about macro-finance variables, such as inflation, vary significantly across genders, even within the same household. We conjecture that traditional gender roles expose women and men to different economic signals in their daily lives, which in turn produce systematic variation in expectations. Using unique data on the contributions of men and women to household grocery chores, their resulting exposure to price signals, and their inflation expectations, we show that the gender expectations gap is tightly linked to participation in grocery shopping. We also document a gender gap in other economic expectations and discuss how it might affect economic choices.
    Keywords: C90 ; D14 ; D84 ; E31 ; E52 ; G11 ; ddc:330 ; gender gap ; expectations ; perceptions ; experiences ; exposure
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
    Language: English
    Type: doc-type:workingPaper
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