Exploring the Macro-Determinants of Inflation Expectations Uncertainty : An Empirical Investigation Using Household Data

Details

Supervisors

Monti, Francesca

Faculty

Faculté des sciences économiques, sociales, politiques et de communication

Degree label

Master [120] en sciences économiques, orientation générale, à finalité spécialisée

Abstract

Inflation is a cornerstone of the economy and keeping it low and stable (at around 2%) is one of the main objectives of central banks, as it makes it easier to predict and preserve its value. However, it has been highly volatile, reaching values well above the target since the start of Covid-19, causing a rise in expectations but also uncertainty around inflation. This casts doubt on the credibility of central banks and monetary policies, making it even more difficult to anchor inflation expectations. Knowing the role of inflation expectations on inflation, seeing a rise in long-term inflation uncertainty is an alarming sign. Therefore, households are not fully confident that inflation will return to a stable level. Inflation uncertainty can also complicate household consumption-saving decisions and firms' pricing and investment decisions (Bloom, 2009). It also influences the transmission of monetary policy (Falck et al., 2021). In this work, taking the Survey of Consumer Expectations (SCE), the aim is to empirically determine what might be causing this uncertainty for households in the US. Particularly, this report finds the positive and significant impact that the expectation of a rise in the unemployment rate can have on uncertainty, with a greater impact for those with lower levels of education as well as those with lower incomes. There are also differences in interpretation when the period considered is only from 2020 onwards. Furthermore, it shows heterogeneity across households. High-income and high-literacy households having decreasing uncertainty when assigning a higher probability that US stock prices will rise over the next 12 months. In the contrary, the same variable is not significant or leads to greater uncertainty for those with fewer resources.