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Are Consumers’ Spending Decisions in Line With an Euler Equation?

Author

Listed:
  • Lena Dräger

    (Johannes Gutenberg University Mainz)

  • Giang Nghiem

    (Goethe-University Frankfurt am Main)

Abstract
Evaluating two new survey datasets of German consumers, we test whether individual consumption spending decisions are formed according to an Euler equation derived from consumption life-cycle models. Measured in qualitative individual changes, our results suggest that current and planned spending are positively correlated, thus supporting the hypothesis of consumption smoothing. Also, current spending is positively correlated with inflation expectations, and negatively with nominal interest rate expectations. Interestingly, the effect of perceived real interest rates is only significant for financial market participants, financially unconstrained households and those with high financial literacy, implying that these are important conditions for the ability to smooth consumption over time. Moreover, these households are better positioned in the wealth and income distributions. In that sense, the ability to smooth consumption may be a channel through which distributional effects of policy shocks may occur. Finally, news on inflation and monetary policy observed by the consumer strengthen the effect of their inflation expectations on current spending, suggesting that imperfect information may also influence the Euler equation relationship.

Suggested Citation

  • Lena Dräger & Giang Nghiem, 2016. "Are Consumers’ Spending Decisions in Line With an Euler Equation?," Working Papers 1802, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 26 Jan 2018.
    • Handle: RePEc:jgu:wpaper:1802
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Euler equation; consumption plans; macroeconomic expectations; households; survey micro data;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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