Fiscal Policy and Households’ Inflation Expectations: Evidence from a Randomized Control Trial
Rising government debt levels around the world are raising the specter that authorities might seek to inflate away the debt. In theoretical settings where fiscal policy “dominates” monetary policy, higher debt without offsetting changes in primary surpluses should lead households to anticipate this higher inflation. Are household inflation expectations sensitive to fiscal considerations in practice? We field a large randomized control trial on U.S. households to address this question by providing randomly chosen subsets of households with information treatments about the fiscal outlook and then observing how they revise their expectations about future inflation as well as taxes and government spending. We find that information about the current debt or deficit levels has little impact on inflation expectations but that news about future debt leads them to anticipate higher inflation, both in the short run and long run. News about rising debt also induces households to anticipate rising spending and a higher rate of interest for government debt.
We thank the Fama-Miller Center and the Initiative on Global Markets, both at the University of Chicago Booth School of Business for financial support for conducting the surveys. Coibion, Gorodnichenko and Weber also thank the NSF for financial support. The authors thank Jonathan Parker and participants of ASSA 2021 for comments. We thank Julien Weber for excellent research assistance. We also thank Shannon Hazlett and Victoria Stevens at Nielsen for their assistance with the collection of the PanelViews Survey. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.