In this paper we analyze how consumers in Germany updated expectations about inaflation in response to the COVID-19 outbreak. We use a fixed effects model to estimate the effect of regional exposure to COVID-19 cases, the stringency of restriction...
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ZBW - Leibniz-Informationszentrum Wirtschaft, Standort Kiel
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In this paper we analyze how consumers in Germany updated expectations about inaflation in response to the COVID-19 outbreak. We use a fixed effects model to estimate the effect of regional exposure to COVID-19 cases, the stringency of restriction measures and local unemployment rates on inflation expectations. We find that consumers who were locally more exposed to COVID-19 cases report higher inflation expectations. e relationship between the virus spread and inflation expectations is amplied if respondents live in high unemployment regions. We explain our findings through an information and experience channel. Information about the pandemic and its effects played an important role during the rst wave of the pandemic. However, when aention to information diminishes, experience matters most. We document that negative personal (how severely the respondent was affected financially) and local experience (how severely the district was affected by COVID-19) are associated with higher ination expectations and more pessimistic views with regard to unemployment, interest rates, house prices and the intention to spend. Our ndings show that it is important to consider regional disparities when examining individual belief formation.
