Abstract: How do households perceive and interpret complex dynamic relationships between macroeconomic variables? Using a rich panel of elicited subjective expectations from households across multiple countries, combined with various sources of exogenous variation, we document a robust positive response of inflation expectations to contractionary demand and supply shocks. While households consistently interpret oil shocks as stagflationary, contractionary monetary policy shocks fail to reduce inflation expectations. We explore the drivers of this surprising pattern. Despite heterogeneity in individual forecasts, expectations are strongly correlated in the cross-section. A clear factor structure emerges: two principal components-remarkably consistent across countries, demographic groups, and levels of financial literacy-explain a substantial share of the variance in expectations. These factors capture households' perceptions of the sources of macroeconomic fluctuations. The first, dominant factor reflects a broad aversion to inflation, while the second relates to perceived labor market dynamics and interest rate movements.

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, 2022 Theories and Methods in Macroeconomics, Philadelphia FED Mortgage Market Research Conference, 2022 SAEe.

Abstract: There is ample evidence in the literature that monetary policy has heterogeneous effects across euro area countries. I show that part of this heterogeneity is explained by the housing and mortgage market institutions, specifically by the share of adjustable-rate mortgages and the homeownership rate. To disentangle the relative importance of these institutions, I incorporate them into a quantitative currency-union New Keynesian model. I calibrate the model to Spain and the euro area and show that the consumption response in Spain is 2.4 times stronger than in the euro area as a whole, in line with the data. The model shows that a higher adjustable-rate mortgage share and a higher homeownership rate interact to amplify the effects of monetary policy on economic activity due to smaller mortgage interest payments and a higher fraction of mortgaged homeowners operating in the market. A euro-area-wide mortgage market would decrease the heterogeneous effects of monetary policy by weakening the pass-through to mortgage rates.