A choice-based approach to the measurement of inflation expectations

Standard survey-based measurement of inflation expectations relies on density forecasts in which respondents assign probabilities to pre-specified inflation bins; this method has been found to induce biases through its bin structure (suggesting that values near zero are more likely), to impose cognitive demands that raise dropout rates, and to become uninformative during high-inflation episodes when responses cluster in open-ended extreme bins—making cross-time and cross-country comparisons unreliable. This paper proposes a new choice-based elicitation method rooted in decision theory that uses a bisection process: respondents first state a minimum and maximum inflation level for which they see almost no chance of actual inflation falling outside the range, avoiding external anchors, and then answer a series of binary choices from which the relevant percentiles of their subjective distribution can be inferred. Two large surveys (UK and US) and a laboratory experiment demonstrate that the method leads to well-defined expectations that fulfil both subjective and objective quality criteria, that it is neither perceived as more difficult nor more time-consuming than the density forecast standard, and that—unlike density forecasts—it is robust to differences in the state of the economy, enabling comparisons across time and countries. The method is portable and can be applied to elicit distributions over other macroeconomic variables beyond inflation.

A Temporary VAT Cut as Unconventional Fiscal Policy

The paper studies Germany’s temporary 3 percentage-point VAT cut from July 1 to December 31, 2020 (standard rate 19%→16%, reduced rate 7%→5%), combining two causal identification strategies with microdata and a HANK model to establish that intertemporal substitution drove a large spending response concentrated in durable goods.

Ex-ante approach (July 2020 BOP-HH survey, fielded immediately after the cut took effect): The survey distinguishes households informed about the January 2021 reversal (treated) from those who believed the cut was permanent (control). Treated households are approximately 10 percentage points more likely to increase durable purchases on the extensive margin. This is a lower bound on the intertemporal substitution effect because some “control” households likely learned about the reversal before the survey, attenuating the control group’s spending behavior toward that of the treated group.

Olga Goldfayn-Frank | Macro Paper Warehouse

A choice-based approach to the measurement of inflation expectations

A Temporary VAT Cut as Unconventional Fiscal Policy