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The recently observed disconnect between inflation and economic activity can be explained by the interplay between the zero lower bound (ZLB) and the costs of external financing. In normal times, credit spreads and the nominal interest rate balance out; factor costs dominate firms' marginal costs. When nominal rates are constrained, larger spreads can more than offset the effect of lower factor costs and induce only moderate inflation responses. The Phillips curve is hence flat at the ZLB, but features a positive slope in normal times and thus a hockey stick shape. Via this mechanism, forward guidance may induce deflationary effects.
We conducted a large-scale household survey in November 2020 to study how altering the time frame of a message (temporal framing) regarding an imminent positive income shock affects consumption plans. The income shock derives from the abolishment of the German solidarity surcharge on personal income taxes, effective in January 2021. We randomize across survey participants whether their extra disposable income is presented in Euros per month, Euros per year, or Euros per ten year-period. Our main findings are as follows: In General, we find our respondents’ intended Marginal Propensity to Consume (MPC) is 28.2%. Across all three treatments, the MPC is a positive function of age and being female while it is a negative function of the income increase’s size, self- control, and being unemployed. Temporal framing effects are statistically and economically highly significant as we find the monthly treatment groups’ average MPC 5.6 and 8.7 percentage points higher compared to the yearly and 10-yearly treatment groups. We will be able to analyze the real consumption behavior of households throughout 2021 based on re-surveying the participants as well as by using transaction-based bank data.
Hilmar Hoffmann : Nachruf
(2018)