Inflation Expectations and Economic Preferences

The aim of this project is to evaluate the relationship between inflation expectations and financial investors’ risk and time preferences. On the one hand, expected inflation affects the real value of future income streams and could thereby influence measures of present bias. On the other hand, cross-sectional variation in inflation expectations may be related to agents’ degree of optimism or pessimism, which could also affect their risk preferences. We thus bring together the literature analyzing the forma tion of individuals’ inflation expectations and the factors contributing to individuals’ present bias or risk preferences. In this project, we will conduct both survey and laboratory experiments with financial investors to identify the causal effect of induced variation in inflation expectations on preferences. In a first subproject, we will use information treatments in a randomized control trial (RCT) to induce changes in inflation expectations. We will then elicit measures of participants’ time and risk preferences to analyze the effect of changes in inflation expectations caused by information on preferences. In the second subproject, we will prime participants randomly with either a “low inflation risk” or a “high inflation risk” treatment to induce positive or negative emotions regarding inflation. We will then measure the change in inflation expectations induced by the priming exercise to test for the role of emotions in shaping the effect of participants’ inflation expectations on time and risk preferences. In the third subproject, we will conduct two laboratory experiments to analyze the behavioral effect of experimentally induced inflation on risk and intertemporal preferences controlling for the financial implications of inflation.