19.06.2023

“Three Essays on the Significance of Consumer Expectations in Monetary Economics”

Alexander Dietrich's dissertation was reviewed by Prof. Dr. Gernot Müller and Prof. Dr. Wilhelm Kohler. In May 2023 the disputation took place. Alexander Dietrich's dissertation contains three chapters studying the role of consumer expectations for business cycle fluctuations and monetary policy.

Chapter 1 is based on a coauthored paper with Keith Kuester, Raphael Schoenle and Gernot Müller. Here, they provide a tailor-made survey that documents consumers' perceptions of the US economy's response to a large shock: the advent of the COVID-19 pandemic. The survey ran at a daily frequency between March 2020 and July 2021. Consumers' perceptions regarding output and inflation react rapidly, while economic uncertainty is pervasive. A business-cycle model calibrated to the consumers' views provides an interpretation. The rise in household un-certainty accounts for two-thirds of the fall in output. Different perceptions about monetary policy can explain why consumers and professional forecasters agree on the recessionary impact but have sharply divergent views about inflation.

Chapter 2 builds on a joint research project with Raphael Schoenle and Gernot Müller. In this project, they measure expectations about the short-run economic impact of climate change in a representative survey of US consumers. Respondents expect not much of an effect on GDP growth but perceive a high probability of costly, rare disasters - suggesting they are salient of climate change. Furthermore, expectations vary systematically with socioeconomic characteris-tics, media consumption, various information treatments and over time. The researchers calibrate a New Keynesian model to the survey's key results and spell out two implications for monetary policy. First, climate change related disaster expectations lower the natural rate of interest substantially. Second, time variation in disaster expectations contributes to cyclical fluctuations.

In chapter 3, Dietrich asks which inflation measure the central bank should target. He shows that optimal monetary policy targets headline inflation if households pay limited attention to different consumption categories when forming inflation expectations. This result stands in contrast to standard rational expectations models, where optimal policy targets core inflation. The core inflation rate excludes volatile energy and food prices (non-core) from headline inflation. Using novel survey data on inflation expectations for disaggregated consumption categories, Dietrich finds household expectations are disproportionately driven by beliefs about future non-core prices. He devels-op a sparsity-based rational inattention model to account for the empirical evidence. While forming inflation expectations, households pay attention to the volatile non-core components; the stable core inflation component receives little attention. Finally, Dietrich embeds this framework into a multi-sector New Keynesian model to derive the optimal inflation target. In the model, targeting headline inflation is optimal, whereas a core inflation target would fail to stabilize the economy sufficiently.