Macro uncertainty, households and firms

Macroeconomic uncertainty and household spending

In this paper Coibion et al. use randomized control trials (RCTs) in a new large cross-country survey of European households to understand how external uncertainty affects their spending. The use of the RCT methodology relies on the fact that information treatments in surveys have the capacity to change agents’ economic expectations in meaningful ways, and hence affect the economic decisions of agents. This paper is the first to use this methodology to study macroeconomic uncertainty and its impact on household spending decisions.

Methodology: The authors use the new Consumer Expectations Survey (CES), an ongoing panel administered by the ECB that interviews every month, since April 2020, about 10,000 households in the six largest euro area economies. The survey covers a wide range of questions on household expectations and behavior. In September 2020, they implemented a special-purpose survey where randomly selected households were provided with certain types of information (or no information) about either euro area GDP growth, disagreement about that future growth, or both growth and disagreement. Subsequent surveys  in October 2020 and January 2021 allowed the authors to assess whether household spending varied with the information treatments. Their findings include:

• Holding constant the first moment of expectations, macroeconomic uncertainty reduces the spending of households over several months and the effect is economically large;
• These adjustments in spending hold across different categories of goods and services. Households are also less likely to purchase large items such as holiday packages and luxury goods;
• The above effects are more pronounced for individuals working in riskier sectors, as well as households whose investment portfolios are most exposed to risky financial assets;
• Finally, when individuals face higher uncertainty, they report that they would be less likely to allocate new financial investments to mutual funds or cryptocurrencies.

The Effect of Macroeconomic Uncertainty on Household Spending
Authors: Olivier Coibion, Dimitris Georgarakos, Yuriy Gorodnichenko, Geoff Kenny, Michael Weber
From: UT Austin, European Central Bank, UC Berkeley, University of Chicago

Macroeconomic uncertainty and firm decisions

In this paper, Kumar et al. use RTCs to study how firms adjust their decisions over their prices, employment, and investment when macroeconomic uncertainty rises.

Methodology: The authors implemented a RCT in a survey of firms in New Zealand. In this survey, randomly selected groups of firms were provided with different pieces of information about the aggregate economic outlook (or no information at all). The first survey, run between June and August of 2021, focused on measuring what firms were planning to do over the next six months in terms of employment, investment, wages and prices among others. The second survey, run six months later between November of 2021 and January of 2022, and asked firms to report what actions they had taken over the previous six months in terms of the same variables as measured in the first wave as well as some additional dimensions, and also measured their macroeconomic and microeconomic expectations again. Their findings include:

• Higher macroeconomic uncertainty leads firms to reduce their prices, employment and investment over the next six months relative to their prior plans;
• They experience a decline in sales but increase their advertising;
• The effect on wages is effectively zero.

While the uncertainty literature has emphasized the dangers of rising uncertainty as a possible source of downturns, the flip side of our results is that they suggest that policymakers could try to reduce uncertainty through communication as a way to stabilize economic activity. […] Policymakers often try to protect their credibility by being deliberately vague in their statements and forecasts to try and avoid being proven wrong expost or having to engage in subsequent policy reversals. The downside of this approach is that it may significantly increase uncertainty among ordinary citizens. Less ambiguity by policymakers and projecting more confidence could potentially achieve the reverse.

The Effect of Macroeconomic Uncertainty on Firm Decisions
Authors: Saten Kumar, Yuriy Gorodnichenko, Olivier Coibion
From: Auckland University of Technology, UC Berkeley, UT Austin