Boris Vujčić: Listening to households: expectations, behaviour and monetary policy

Speech by Boris Vujčić, Vice-President of the ECB, at the inauguration of the Alexander von Humboldt Professorship awarded to Professor Michael Weber at the European School of Management and Technology (ESMT) Berlin

Thank you, Michael, and thank you to ESMT for the invitation. It is a pleasure to be here for this inauguration and to speak about a topic to which Michael has made an outstanding contribution: how households form expectations and why those expectations matter for monetary policy.

Monetary policy is, by its nature, forward-looking. We track inflation, wages, consumption, credit and financial conditions. But none of these data fully tell us what households believe and how these beliefs feed into their economic and financial decisions, how uncertain they are, or why similar shocks produce different responses across population sub-groups and countries.

The insights from expectations surveys matter, because expectations about the future shape decisions and behaviour today. Expectations about inflation, income, employment, interest rates and house prices affect spending, saving, investment, borrowing and wage demands. They therefore play a key role in shaping the transmission mechanism of monetary policy.

For a long time, macroeconomic analysis often relied on strong assumptions that expectations were rational. Over the past two decades, evidence has shown the limits of those assumptions for many policy questions. A foundational contribution was to measure expectations directly rather than infer them from outcomes alone.[1]