Public Debt and Household Inflation Expectations

Author: Mr. Francesco Grigoli and Mr. Damiano Sandri

Volume/Issue: Volume 2023 Issue 066

Publication date: March 2023

ISBN: 9798400235214

$20.00

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Topics covered in this book

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Banks and Banking , Inflation , Economics- Macroeconomics , Money and Monetary Policy , Public Finance , Economics / General , Capital controls , capital outflows , financial crises , inflation expectation , household inflation expectation , increase inflation expectation , sensitivity of inflation expectation , public debt level , Inflation , Inflation targeting , Quasi-fiscal operations , Global

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Summary

We use randomized controlled trials in the US, UK, and Brazil to examine the causal effect of public debt on household inflation expectations. We find that people underestimate public debt levels and increase inflation expectations when informed about the correct levels. The extent of the revisions is proportional to the size of the information surprise. Confidence in the central bank considerably reduces the sensitivity of inflation expectations to public debt. We also show that people associate high public debt with stagflationary effects and that the sensitivity of inflation expectations to public debt is considerably higher for women and low-income individuals.