Financial Expectations and Household Consumption: Does Middle-Inflation Matter?

Abstract

We explore the finding that households often expect their financial position to remain unchanged compared to other alternatives. A generalized middle inflated ordered probit (GMIOP) model is used to account for the tendency of individuals to choose “neutral” responses when faced with opinion-based questions. Our analysis supports the use of a GMIOP model to account for this response pattern. Expectation indices based on competing discrete choice models are also explored. While financial optimism is significantly associated with increased consumption at both the intensive and extensive margin, indices which fail to take into account middle-inflation overestimate the impact of financial expectations.