European Central Bank working paper finds cost-of-living fiscal announcements lift households’ inflation perceptions and lower unemployment perceptions

The European Central Bank published Working Paper No 3139 analysing how euro area households update their beliefs after fiscal policy announcements during the cost-of-living crisis. Exploiting the timing of price-related expansionary fiscal announcements in Germany, Spain, France and Italy relative to survey participation, the paper finds that announcements raise households’ perceptions of current inflation and reduce their perceptions of unemployment, while leaving inflation expectations broadly unchanged. The study documents 50 price-related measures announced in the second half of 2021 and 2022, drawing on a confidential European System of Central Banks dataset and validating announcement dates using spikes in Google searches. Using the ECB’s Consumer Expectations Survey and a regression discontinuity design around announcements (baseline bandwidth 56 days), the estimated effect is an increase of about 0.19 percentage points in perceived inflation and a fall of about 0.17 percentage points in perceived unemployment, with a further decline of about 0.24 percentage points in one-year-ahead unemployment expectations. Effects on one- and three-year-ahead inflation expectations are close to zero, and there are no significant effects on spending or growth expectations. A New Keynesian model with information frictions and an inflation-stabilising fiscal rule is used to interpret results, with counterfactual exercises suggesting the signalling component of fiscal announcements explains most of the observed belief revisions. The paper is research and does not represent the views of the European Central Bank.