Can consumers’ inflation expectations help stabilise the economy?
By Ioana Duca-Radu, Geoff Kenny and Andreas Reuter
Economists have argued that when interest rates set by policymakers cannot go any lower, the economy can be stabilised if consumers expect the rate of inflation to increase. Yet, the evidence for this stabilising effect has been very mixed. In this article we review new evidence from a monthly survey of over 25,000 individual consumers across the euro area showing that consumers are indeed more ready to spend if they expect inflation to be higher in the future. While generalised in the population, the stabilising effect is stronger when nominal interest rates are constrained at the lower bound.