From traits to rates: How personality shapes inflation expectations

Summary

Using survey data from Austrian households, this paper examines how personality traits influence households’ inflation expectations. We measure the Big Five personality traits and show they explain 70 % more of the differences in expectations than sociodemographic factors like age and income alone. For example, households which are very open expect inflation to be higher than those with very low levels of openness. Personality traits can help to explain why many Austrians anchor their expectations to past prices rather than the ECB‘s inflation target, and how inaccurate their predictions about future inflation are.

Highlights

Heterogeneity in inflation expectations 
Most economic research explains heterogeneity in household inflation expectations primarily through sociodemographic characteristics leaving a large share of variation unexplained. 

Personality traits matter 
Using Austrian household survey data the paper shows personality traits to explain substantial additional heterogeneity in inflation expectations and forecast accuracy beyond standard determinants.

One-size-fits-all, NOT! 
Personality-driven heterogeneity implies that monetary policy transmission and expectation management are uneven across households, showing the importance of accounting for personality traits in policy making and modeling.