Abstract
This project aims to shed light on the relationship between households’ expectations, their understanding of the relationship between inflation and other economic variables, and their high-frequency data on financial and labor market decisions. Specifically, in the first wave we survey clients of an Icelandic Bank and link these data to high-frequency data on their financial decisions. In the survey, at the baseline, we elicit respondents’ expectations regarding inflation, income, spending, consumption, choice of mortgage type, etc., as well as how they perceive the link between inflation and other various economic variables. A randomized subset of respondents is then informed either about (1) the past and current rate of inflation; (2) the past and current rate of inflation, and the real income effects of inflation (for example, erosion of income as well as debt in the case of high inflation; implications for inflation-indexed versus non-indexed mortgages); (3) the past and current rate of inflation, and the intertemporal substitution channel in the presence of inflation; (4) the past and current rate of inflation, and both the real income effect of inflation and the intertemporal substitution effect. At the endline, respondents are re-asked about their expectations and intended plans. We then also propose to investigate the impact on actual subsequent financial decisions, using the bank data. In the second wave, to be fielded a few months later, we will ask respondents again about their intermittent spending, financial decisions, and labor market outcomes, re-test their understanding of the mechanisms linking inflation and other macro and micro-economic variables, and study the degree and the persistence of learning about them.