THE IMPACT OF EXPECTED PRICE INFLATION ON CONSUMER ASSET AND LIABILITY HOLDINGS

GREGORY ARTHUR FALLS, Purdue University

Abstract

The intent of this study is to examine the impact of expected inflation on consumer portfolios once other consumer attitudes and expectations have been taken into account. Certain demographics and financial characteristics are also controlled for in the empirical analysis. The propositions concerning desired asset and liability holdings are derived from a theoretical model. These propositions are: (1) desired debt holdings and desired real asset holdings are positively related to expected inflation and (2) if the substitution effect dominates the income effect desired financial asset holdings are inversely related to expected inflation. The reduced form of a general stock adjustment model is estimated to ascertain the effect of expected inflation on observed consumer asset and liability holdings. The t-statistics for the reduced form coefficients indicate that expected inflation has a significant impact, at the ten percent level, on the actual holdings of checking accounts, savings accounts combined with certificates of deposit, common stock, and non-installment debt. From these reduced form coefficients unique estimates of the structural coefficients of the empirical model are obtained. Asymptotic variances are computed for these structural coefficients. The asymptotic t-statistics for these coefficients suggest that expected inflation has a significant impact, at the ten percent, on desired holdings of savings accounts combined with certificates of deposit and common stock.

Degree

Ph.D.

Subject Area

Economics

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