An Experiment on Consumption Responses to Future Prices and Interest Rates

Abstract

We design an experiment to investigate the influence of announced future variations in interest rates and prices on consumption decisions. In an experimental implementation of the discounted utility model, the subjects learn the entire paths of inflation and interest rates prior to deciding on a consumption path. We decompose the total change in consumption that results from changes in either interest rates or inflation rates into anticipation and impact effects. While impact effects are of similar orders of magnitude as in the model, future changes in inflation or interest rates exert substantially smaller effects on current consumption than predicted by the model.

Citation

Luhan, W.J., Roos, M.W.M. and Scharler, J. (2014), "An Experiment on Consumption Responses to Future Prices and Interest Rates", Experiments in Macroeconomics (Research in Experimental Economics, Vol. 17), Emerald Group Publishing Limited, Leeds, pp. 139-166. https://doi.org/10.1108/S0193-230620140000017005