Inflation expectations and household expenditure: Evidence from pseudo-panel data in Japan

Abstract

This paper examines to what extent a rise in inflation expectations stimulates current household expenditure in Japan. Using matched household datasets, we find the following. First, to the extent that the rise in inflation expectations is from about 0% to the 2−10% range, durable goods expenditure is significantly stimulated. Second, total expenditure increases by 1.0% in response to a one percentage point rise in inflation expectations, about 82% of which is explained by the response of durable goods expenditure. Third, storable and non-storable non-durable goods expenditures (especially the latter) do not respond significantly to the inflation expectations. Finally, a temporary rise in inflation expectations immediately stimulates total expenditure, but produces a similar degree of decline over a few quarters, with virtually no long-run impact.