Title: Nonlinear effects of inflation expectations on durable consumption: The role of household balance sheets
Authors: Lenard Lieb - Maastricht University (Netherlands)
Johannes Schuffels - Maastricht University (Netherlands) [presenting]
Abstract: Research interest in the reaction of consumption to expected inflation has increased sharply in recent years due to efforts by central banks to kick start demand through higher inflation expectations. We contribute to this literature by analyzing whether various components of households balance sheets determine how consumption reacts to expected inflation. Theoretically, many channels are conceivable: an increase in inflation expectations can raise consumption through direct increases in expected wealth, e.g. for households with nominal debt contracts. By affecting the real interest rate, expected inflation can interact with wealth if only those households can adapt their consumption to current real interest rates that are not credit constrained or sufficiently liquid to shift funds between consumption and savings. To empirically assess these nonlinearities in the consumption effects of expected inflation we apply a lasso-based post-double variable selection model to a large dimensional household survey conducted by the Dutch central bank. The model selects those interactions between expected inflation and a large set of household balance sheet components that explain realized vehicle expenditures. By allowing for a wide range of functional forms of these interactions, we specifically investigate possible nonlinearities.