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The impact of income and inflation expectations on consumption: Evidence from a laboratory experiment
This study examines moderating effect of income expectations on the influence of inflation expectations on consumption decisions in a laboratory setting. Using a multi-round life-cycle consumption-saving model, the research manipulates participants’ beliefs on the future prices and income. Contrary to the hypothesis that expected income growth would attenuate the effect of expected price increases on consumption, the study finds no significant moderating effect of income expectations on this relationship. Participants allocated similar proportion of their income to consumption regardless of whether they anticipated increases in income alongside infl ation. This fi nding challenges the conventional view that future income expectations buffer the impact of infl ation on spending decisions. The experimental design ensures high internal validity by directly measuring consumption behavior under controlled conditions; however, external validity remains limited due to the artificial nature of the laboratory setting. Overall, the study contributes new experimental evidence to the behavioral macroeconomics literature and offers valuable insights for policymakers, particularly central banks, by clarifying how consumers respond to confl icting signals of price and income increases.