Fiscal and inflation expectations of consumers in the era of large fiscal expansions

This study investigates the relationship between consumers’ fiscal and inflation expectations using granular survey data. After applying various methods to reduce endogeneity bias and providing several robustness checks, we show that consumers’ fiscal expectations positively affect their inflation expectations. Moreover, we demonstrate that this link is nonlinear and becomes stronger with the deterioration of the fiscal stance, particularly in response to increases in consumer expectations regarding future fiscal expansions. This novel empirical finding is especially relevant from both fiscal and monetary policy perspectives.