The ECB’s Consumer Expectation Survey queries households in the largest six euro area countries about their expectations for a wide range of macroeconomic and individual-level variables. We document strong correlations between these expectations, which we use to identify two principal components that explain a significant portion of the variance of all expectations. Judging from the sign of the loadings on expected prices and quantities, we interpret these components as capturing households’ perceptions of the sources of macroeconomic dynamics, with the first capturing supply-side shocks and the second component reflecting demand-side shocks. A panel analysis shows that the first and the second household-level principal component scores are associated with opposite movements in household realized consumption and precautionary savings, uncovering the differential effects of supply and demand shocks.

Finalist at the 2022 ECB Young Economist Prize

Presented at: Boston University, Collegio Carlo Alberto, Universidad Carlos III de Madrid, IE University, Federal Reserve Board, European Central Bank, Central Bank of Italy, Central Bank of Denmark, Central Bank of the Netherlands, Central Bank of Lithuania, 2021 European Winter Meeting of the Econometric Society, BU-BC Green Line Macro Meeting, Theories and Methods in Macroeconomics, Philadelphia FED Mortgage Market Research Conference