Refine
Document Type
- Working Paper (2)
Language
- English (2)
Has Fulltext
- yes (2)
Is part of the Bibliography
- no (2)
Keywords
- Causal Reasoning (1)
- Expectation Formation (1)
- Inflation (1)
- Narratives (1)
We provide evidence on narratives about the macroeconomy - the stories people tell to explain macroeconomic phenomena - in the context of a historic surge in inflation. In surveys with more than 10,000 US households and 100 academic experts, we measure economic narratives in open-ended survey responses and represent them as Directed Acyclic Graphs. Households' narratives are strongly heterogeneous, coarser than experts' narratives, focus more on the supply side than on the demand side, and often feature politically loaded explanations. Households' narratives matter for their inflation expectation formation, which we demonstrate with descriptive survey data and a series of experiments. Informed by these findings, we incorporate narratives into an otherwise conventional New Keynesian model and demonstrate their importance for aggregate outcomes.
Do household inflation expectations affect consumption-savings decisions? We link survey data on quantitative inflation expectations to administrative data on income and wealth. We document that households with higher inflation expectations save less. Estimating panel data models with year and household fixed effects, we find that a one percentage point increase in a household's inflation expectation over time is associated with a 250-400 euro reduction in the household's change in net worth per year on average. We also document that households with higher inflation expectations are more likely to acquire a car and acquire higher-value cars. In addition, we provide a quantitative model of household-level inflation expectations.