Abstract
Using the Consumer Expectations Survey of the ECB, I estimate how individual expectations on core economic outcomes changed in France, Germany, Italy, and Spain right after the beginning of the Ukraine–Russia war. I find that individuals expected lower economic growth and higher inflation. The effect of the war was larger in the countries with a higher energy-imports dependency. Hence, the expectation formation process might have changed.
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Source: ECB. FR: France; DE: Germany; IT: Italy; ES: Spain. Complete set of covariates is in Table 4
Notes
Kolesár and Rothe (2018) derive theoretical results and present simulations showing that confidence intervals based on clusters of the running variable, i.e. the standard solution, are not robust to model misspecification and have poor coverage properties. They introduce confidence intervals that achieve asymptotically correct coverage, under mild assumptions.
Even other surveys provide income brackets (e.g. the publicly available version of the European Labour Force Surveys) because they increase the credibility of the answers and reduce measurement error and item-non-response (Stantcheva 2022). Moreover, income brackets deliver a very flexible model specification (i.e. saturated model). Because each bracket has its own coefficient, the results do not depend on which functional form the researcher imposes.
Also, the test implies that the estimated effects are confirmed if I implement the reweighting estimator of Kline (2011). Results are available upon request.
As for alternative model specifications, I estimate one without controls, i.e. unconditional, and one where the conditional expectation function can vary flexibly on the two sides of the treatment periods. As for the inferential methods, I selected the bandwidth using the tool of Kolesár and Rothe (2018). These robustness checks are in Table 6.
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A Mattia e Giacomo, con amore. I benefited from the comments of the Editor and the Associate Editor. I would like to thank Monica Andini, Federico Cingano, Francesco D’Amuri, Virginia Di Nino, Elisa Guglielminetti, Geoff Kenny, Marianna Kudlyak, Alex Tagliabracci, Concetta Rondinelli, and seminar participants at ECB-CES seminar. Replication files and additional results will be available at the webpage: http://sites.google.com/site/domdepalo/. The views expressed in this paper are those of the author and do not imply any responsibility of the Bank of Italy.
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Depalo, D. Gloomy expectations after the invasion of Ukraine. Empir Econ (2024). https://doi.org/10.1007/s00181-023-02550-3
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DOI: https://doi.org/10.1007/s00181-023-02550-3