Kerstin Westergren

Research interests

• Primary:

  • • Macroeconomics

    • Monetary Economics

• Also interested in:

  • • Household finances

    • Inequality

Research

Job Market paper

"Inflation expectations of rationally inattentive consumers"

Abstract:  Why do consumers’ expenditure patterns matter for their inflation expectations? I propose a model of rational inattention where a consumer trades off paying attention between goods bought more or less frequently. For each good purchased, the consumer observes the rate of price change with an error that depends on the frequency at which the good is purchased. Goods bought less frequently are observed with a greater level of error. I apply a simple version of the model where the inflation index is decomposed into two sub-index components; one sub-index contains goods bought often, and the other contains goods that are not bought often. My results show that the consumer pays more attention to goods bought often. The model is able to match about 60% of the variation in the inflation expectations of the average Swedish household over the time period 2002-2017. A decomposition of the model shows that the consumer’s attention allocation trade-off between these two sub-index components is an important factor in the model’s ability to explain the variation in inflation expectations expressed by Swedish households.

Working papers and work in progress

"How do monetary policy announcements affect inflation expectations?"

Submitted

Abstract:  What is the effect of monetary policy rate announcements on inflation expectations? I examine this question using survey data of Swedish households’ inflation expectations over the time period 2003-2016. My results show that the immediate effect on the average household’s inflation expectations of an announced increase in the policy rate is significant and positive. This result may be interpreted as the policy announcement signaling the central bank’s private information on the direction of future inflation. Specifically, a division of the monetary policy surprise associated with each announcement as either a pure monetary policy surprise or an information surprise shows that the effect of an announced increase in the policy rate on inflation expectations is significant and positive only for the latter type of surprise. However, I find that there is heterogeneity in the effect of monetary policy rate announcements on inflation expectations across household types. The results are stronger for respondents who are of working age; live in owned housing; live in metropolitan areas; are of male gender.  The results also differ across time periods and are mainly driven by the great financial crisis, which may reflect that households pay more attention to monetary policy rate announcements when inflation is relatively important to them, i.e., when inflation is high and volatile.

"What is the effect of a dual taxation reform on wealth inequality?" 

Joint with Charlotte Paulie and Markus Ridder

Abstract: For the past several decades, wealth inequality has increased in many countries. Do changes in the tax system contribute to these trends? Using a quantitative model, we examine the effect on wealth inequality of changing from a comprehensive to a dual tax system. We start with a standard open-economy incomplete-markets model, to which we add an entrepreneurial sector. The entrepreneurs in the model exploit the duality of the tax system after the reform by declaring income as capital (taxed at a flat rate) rather than labor income (taxed progressively). The model is parameterized to match the characteristics of the Swedish economy under dual taxation. In contrast to previous studies, we estimate the parameters of the stochastic process for entrepreneurial income using micro-data observations. We find that the introduction of a dual tax system increases wealth inequality and that the possibility of the entrepreneurs to declare income as capital plays an important role for this result. We also find that the level of aggregate capital and the share of entrepreneurs is higher in an economy with a dual tax system. 

Contact me

Kerstin Westergren

Department of Economics

Box 640

40530 Göteborg

Sweden

Phone: +46(0)73 537 05 70

Email: kerstin.westergren [at] economics.gu.se