Economic Studies 200

Kerstin Westergren

Essays on Inflation Expectations, Monetary Policy and Tax Reform

Department of Economics, Uppsala University

Visiting address: Kyrkogårdsgatan 10, Uppsala, SwedenPostal address: Box 513, SE-751 20 Uppsala, SwedenTelephone: +46 18 471 00 00Telefax: +46 18 471 14 78Internet: http://www.nek.uu.se/_______________________________________________________

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Kerstin Westergren

Essays on Inflation Expectations, Monetary Policy and Tax Reform

Dissertation presented at Uppsala University to be publicly examined in Hall 2, Ekonomikum,Kyrkogårdsgatan 10 B, Uppsala, Thursday, 9 September 2021 at 15:15 for the degree ofDoctor of Philosophy. The examination will be conducted in English. Faculty examiner:Professor Mirko Wiederholt (SciencesPo, Paris).

AbstractWestergren, K. 2021. Essays on Inflation Expectations, Monetary Policy and Tax Reform.Economic studies 200. 124 pp. Uppsala: Department of Economics, Uppsala University.ISBN 978-91-506-2885-2.

This thesis consists of three self-contained essays.Essay I: Why do consumers’ expenditure patterns matter for their inflation expectations? I

propose a model of rational inattention where a consumer trades off paying attention betweengoods bought more or less frequently. For each good purchased, the consumer observes the rateof 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 versionof 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. Myresults show that the consumer pays more attention to goods bought often. The model is able tomatch about 60% of the variation in the inflation expectations of the average Swedish householdover the time period 2002-2017. A decomposition of the model shows that the consumer’sattention allocation trade-off between these two sub-index components is an important factorin the model’s ability to explain the variation in inflation expectations expressed by Swedishhouseholds.

Essay II: What is the effect of monetary policy announcements on inflation expectations?Using survey data of Swedish households’ inflation expectations over the time period2003-2015, I examine this question using a two-stage least squares regression model. Theannounced changes are instrumented by a monetary policy surprise variable, obtained fromhigh-frequency swap trade data. I find that the immediate effect of an announced increase in thepolicy rate on inflation expectations is significant and positive. This result may be interpretedas the policy announcement signaling the central bank’s private information on the directionof future inflation. Specifically, a division of the monetary policy surprise associated with eachannouncement as either a pure monetary policy surprise or an information surprise shows thatthe effect of an announced increase in the policy rate on inflation expectations is significant andpositive only for the latter type of surprise.

Essay III (with Charlotte Paulie and Markus Ridder): For the past several decades, wealthinequality has increased in many countries. Do changes in the tax system contribute to thesetrends? Using a quantitative model, we examine the effect on wealth inequality of changingfrom 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 modelexploit the duality of the tax system after the reform by declaring income as capital (taxed at aflat rate) rather than labor income (taxed progressively). The model is parameterized to matchthe 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 inequalityand that the possibility of the entrepreneurs to declare income as capital plays an important rolefor this result. We also find that the level of aggregate capital and the share of entrepreneurs ishigher in an economy with a dual tax system.

Keywords: Inflation expectations, Rational inattention, Frequency of purchase, Consumers,Monetary policy, Instrumental Variables, Event studies, Entrepreneurs, Wealth inequality,Dual taxation, Tax reform

Kerstin Westergren, Department of Economics, Box 513, Uppsala University, SE-75120Uppsala, Sweden.

© Kerstin Westergren 2021

ISSN 0283-7668ISBN 978-91-506-2885-2URN urn:nbn:se:uu:diva-445624 (http://urn.kb.se/resolve?urn=urn:nbn:se:uu:diva-445624)

Dedicated to my husband, Victor.

Acknowledgments

The economic agents in the model world are usually alone in their struggles(at least they are in this thesis). Life as a PhD student can also be pretty lonelyat times. However, unlike for the loners at the center of many economic mod-els, for me, the last years’ battle has not been in isolation. I have oftentimesfound that my progress is detrimentally dependent not only on the attention Iallocate to my own work, but on the attention allocated by others. Indeed, Iowe gratitude to so many that have devoted their time and effort to me and tomy research.

First and foremost, I would like to thank my main supervisor, Nils Gottfries,for the many hours you spent discussing and helping me with my research.Your extraordinary eye for detail combined with your extensive knowledge ofeconomics have been of great importance to me during the process of writingthis thesis. For this, I am grateful to you, but above all, I am grateful that youhave taught me so much about the research process. I would also like to thankmy assistant supervisors: Stefan Pitschner and Daria Finocchiaro. Stefan, Iam thankful to you for always giving to-the-point advice, for your honesty,and for providing me with new perspectives throughout this process. WhileStefan kept my spirits up during the first few years of the PhD, Daria kept mefocused during the last crucial years. Daria, I am grateful to you for seeing thebigger picture, for always showing me compassion, and for your ability makepriorities in times when I needed it the most.

Furthermore, I would like to thank the discussant at my final seminar, To-bias Broer, and the co-discussant, Christoph Hentrich, for their constructivefeedback on this thesis. A big thank you to Alexandre Kohlhas at the IIES, forsupport, encouragement, and above all, for constructive comments on my jobmarket paper. I would also like to extend my gratitude to the National Instituteof Economic Research for the provision of survey data.

I have had the benefit of sharing the countless hours spent at the Depart-ment of Economics with excellent colleagues and administrative staff. I amimmensely grateful to all of you for your support, comments and suggestions,and companionship. Mikael Carlsson and Erik Öberg, thank you for alwayskeeping an open door; for lending your support and providing constructivefeedback, both in big and small. Georg Graetz and Mikael Bask, thank youfor advice and constructive comments. Peter Fredriksson, Luca Repetto, andMounir Karadja, I am grateful for your support and guidance during the jobmarket process.

I would also like to thank my fellow PhD students at the department. Istarted this journey with an exceptional cohort: Tamás Vasi, Jonas Klarin,

Vivika Halapuu, Fredrik Hansson, Dmytro Stoyko, Melinda Süveg, and Char-lotte Paulie. Thank you for all the laughs, talks, and company during the manyhours spent studying during our first year of the PhD program. Thanks Tamás,for your kindness, for always sharing knowledge, thoughts, and ideas. Thankyou Jonas and Vivika, for all the talks, both the serious and the silly. ThanksFredrik, Dmytro, and Melinda for the beers, debates, and many laughs. Iwould also like to especially thank Charlotte for being a reliable partner incrime over the years: as an office mate, during the summer course in Italy, aswell as the semester we spent in New York. Thank you Markus Ridder, forco-authoring a paper with Charlotte and me. Working with the two of you hasbeen one of the best experiences during my time as a PhD student.

The road to a PhD can indeed be a bumpy one. I have gotten through thebooms and busts of this business cycle, so to speak, with the help of reliablecolleagues. To this end, I am grateful to Maria Sandström, Anna Johansson,Maria Olsson, Sofia Hernnäs, and Daniel Bought, who have brightened up thelast few years. I would also like to thank Elin Boström, Josefin Videnord,Lillit Ottosson, Anna Toresson, and Lovisa Rambjer, for the fun (and sweaty!)gym sessions. I am also grateful for all the amusing conversations and dosesof energy provided by Mohammad Sepahvand, Aino-Maija Aalto, CristinaBratu, Lucas Tilley, and Yaroslav Yakymovych during the lunch hours.

Outside the department, I owe gratitude to the Research Division and theMacro Financial Analysis Division for making my internship at the Riksbanka great experience. Special thank you to Roberto Billi and Chistoph Bertschat the Research Division, and Jens Iversen, along with his team at the MacroFinancial Analysis Division (Amanda, Ana Maria, Bul, Gustav, Henrik, Jan,and Tommy), for their hospitably, constructive comments on my research, andfor making me feel right at home. Also, thank you to Thorsteinn SigurdurSveinsson and Frederick Zadow, I am glad that our internships coincided –thank you for all the coffee breaks, lunches, and beers.

I owe gratitude to Michael Woodford for sponsoring my semester at ColumbiaUniversity, and to Hassan Afrouzi for suggestions on my research. During myvisit at Columbia, I met Geghetsik Afunts, a PhD student from Charles Univer-sity, Prague. I am so happy that our paths crossed and to have you as a friend.Thank you for exploring New York City with me, and making the semester atColumbia a truly memorable time.

Outside of the world of economics, I am thankful to my friends who remindme that there is more to life than working. Thank you to my fellow Skåningar-in-exile: Helena Mogianos von Gegerfelt, Anna Markby, and Marcus FermLang. I consider myself lucky to have friends like you, with whom, evenafter a long time apart, I can always be myself and just pick up where we lastleft off. Back home (yes, Skåne), I am grateful for my long friendship withJosefine Kingstedt, Petra Nordqvist, and Jeanette Dunn Ekelund. Thank youfor visiting me in New York; exploring restaurants as well as speakeasy bars,and going on fun shopping trips. Thank you also to Josefin Kilman, for your

kindness, reliable friendship, and for sharing the struggles of the life as a PhDstudent.

My final thanks goes to my family. I am grateful to my mother Lena andher husband Torbjörn, my father Lars and his partner Ann-Charlotte, and mybrother Jojje, for all their support and encouragement throughout the years.Thank you also to my husband, Victor, for sharing your life with me, andfor sticking with me, even as I in many instances probably have attended abit too carefully to my research. Thank you for believing in me, for yourunderstanding, and love. Last, but not least, I would like to thank to our son,Olof. During this last hectic year, I am grateful to you for impatiently keepingme in the present moment, making me smile, and reminding me of what isimportant in life.

Uppsala, June 2021Kerstin Westergren

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

1 Inflation Expectations of Rationally Inattentive Consumers . . . . . . . . . . . . . . . . . . . . 111.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121.2 The model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

1.2.1 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151.2.2 Stage 3: Forecast of the average rate of inflation . . . . . . . . . . . . . . . . . . . . . 171.2.3 Stage 2: Forecast for a given allocation of attention . . . . . . . . . . . . . . . 171.2.4 Stage 1: The attention allocation choice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181.2.5 Analytical solution without frequency related errors . . . . . . . . . . . . . . 201.2.6 General solution with frequency related errors . . . . . . . . . . . . . . . . . . . . . . . . 22

1.3 Model performance evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251.3.1 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251.3.2 Calibration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271.3.3 The model’s performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

1.4 The role of information frictions in the model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341.4.1 Calibration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351.4.2 The models’ performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

1.5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

2 How do monetary policy announcements affect inflation expectations? . 532.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542.2 Theoretical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 572.3 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

2.3.1 Inflation Expectations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 582.3.2 The Riksbank’s decision process and announcements . . . . . . . . . . . . 592.3.3 Monetary policy surprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

2.4 Empirical Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 632.4.1 The Regression Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 632.4.2 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 652.4.3 Interpretations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

2.5 Robustness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 712.5.1 The Financial Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 722.5.2 Extreme Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

2.6 Heterogeneity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 732.7 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

3 Dual income taxation and wealth inequality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 853.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 863.2 Background: dual taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 883.3 The model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

3.3.1 The agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 893.3.2 The tax system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

3.4 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 933.4.1 Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 953.4.2 Wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

3.5 Parameterization of the model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 973.5.1 Separately estimated parameters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 993.5.2 Jointly estimated parameters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1063.5.3 Model vs. data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

3.6 Results: the dual tax reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1103.6.1 Steady-state comparison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1113.6.2 Transition paths . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1123.6.3 The role of income shifting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

3.7 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120

Introduction

Consumer behavior has a major impact on the aggregate economy, e.g., viaconsumers’ decisions on how much to save and consume. Moreover, con-sumers’ decisions on how to act today are guided by their expectations aboutthe future. Indeed, expectations matter for financial decision-making, salarynegotiations, and for policy makers. Specifically, policy makers may striveto influence consumers’ behavior via their expectations; the government mayaim at influencing the savings choices of consumers via a change in the taxsystem, and the central bank may aim at influencing consumers’ expectationsof the future rate of inflation by announcing a change to the policy rate.

This thesis investigates how consumers’ expectations are formed and howtheir expectations and choices are affected by policy actions. Thus, consumers,i.e., individual economic agents and households, constitute the main unit ofanalysis of this thesis, which consists of three self-contained essays. Eachessay takes off from a theoretical framework specific to the issue under con-sideration and makes an application using Swedish data. Being a small andopen economy with a long history of stable institutions, with rich and detailedmicro data sources, Sweden serves as a useful case study for each application.

Specifically, in Essay I, I examine how consumers form their inflation ex-pectations and ask why consumers’ expenditure patterns matter for their infla-tion expectations. In Essay II, I examine how the central bank’s policy rateannouncements affect inflation expectations. Lastly, in Essay III, joint withCharlotte Paulie and Markus Ridder, we examine the effect of a tax reform onthe wealth distribution via consumers’ occupational and savings decisions.

The rest of this introductory section is structured as follows. First, I give anintroduction to the first two essays and the main topic in focus in these essays;inflation expectations. Second, I provide a brief introduction to the third essayand the topic in focus in therein, i.e., wealth inequality.

Inflation expectationsInflation expectations affect inflation outcomes as well as overall economic ac-tivity, via firms’ price setting decisions, individual financial decision making,and the wage demands posed by unions and workers. Furthermore, inflationexpectations constitute an important part of the transmission channel throughwhich the central bank’s monetary policy is transmitted to the real economy.Many central banks have adopted inflation targets with the aim of anchoring

1

agents’ expectations of the future rate of inflation at a target rate (Gürkaynaket al., 2010).

To establish accountability and democratic legitimacy for its actions and tokeep expectations at the target, an effective and credible communication bythe central bank is important (see, e.g., Binder, 2017). To meet this end, manycentral banks aim at explicitly communicating their actions to the general pub-lic. However, consumers’ inflation expectations are often found to differ fromthose of professional forecasters and financial market participants (Carroll,2003, Coibion and Gorodnichenko, 2015a), and these differences may haveimportant economic implications due to the sizeable impact of households’consumption decisions on the general performance of the economy. There-fore, it is important to understand how households form their expectationsabout the future rate of inflation.

Figure 1. Survey data and model simulationFigure 1. The figure shows the monthly inflation expectations of Swedish households (dashedline) for 2002-2017 (Consumer Tendency Survey, Swedish National Institute of Economic Re-search) and the realized 12-month rate of inflation (blue line) (Consumer Price Index, StatisticsSweden).

Figure 1 shows the monthly average expectations of the rate of inflation1

over the upcoming 12 months of Swedish households over the time period2002-2017 (dashed line), together with the rate of inflation2 realized 12 monthslater, as measured by the Consumer Price Index (CPI). As the figure shows,

1For the case of Sweden, micro-data observations of consumers’ inflation expectations are avail-able on a monthly basis, starting in 2002, via the Consumer Tendency Survey (National Instituteof Economic Research).2The rate of inflation, available via Statistics Sweden, is here measured as the 12-month rate ofinflation, i.e., πt = (Pt −Pt−12)/Pt−12, where Pt is the price level as measured by the monthlyCPI.

2

households’ expectations deviate from the realized rate of inflation; both interms of the level and deviation from the mean at any given point in time.3 Fur-thermore, the volatility of the CPI, e.g., around the financial crisis in 2008/2009and the Eurozone crisis around 2011/2012, are not matched by households’ ex-pectations. These observations raise the question of how consumers form theirinflation expectations and what induces consumers to alter their expectations.

In Essay I, I consider the question of how agents form expectations aboutthe future rate of inflation, and ask why consumers’ expenditure patterns mat-ter for how they form their inflation expectations. I suggest a rational inat-tention model, which is closely related to Mackowiak and Wiederholt (2009),Mackowiak et al. (2018), and Kohlhas and Walther (2020), but is modifiedto take into consideration the consumer’s need to trade off paying attentionbetween goods bought at different frequencies. The concept of rational inat-tention is based on the idea that agents have a limited capacity to processinformation and attention is a scarce resource (see, e.g., Sims, 2003).

In the framework that I suggest, the consumer receives one noisy infor-mation signal about the rate of price change of each of the different types ofgoods bought. The noise in the signal has two sources. First, there is oneexogenous component which depends on the frequency at which the type ofgood is purchased. Here, my assumption is that purchases of goods generatesignals concerning the sub-index rate of price change with an exogenous er-ror that is greater the less frequently the good is bought. Second, there is anendogenous component which is dependent on the attention allocated by theconsumer to the signal.

My model predicts that the consumer pays more attention to goods with agreater expenditure share, that have more volatile or persistent rates of pricechange, and goods that are bought more often. I parameterize the model usingSwedish data and find that the model is successful in matching a large portionof the variations in the inflation expectations of the average Swedish householdover the time period 2002-2017. I find that the success of the model is largelydue to the attention allocation trade-off featured in the model. Consumersallocate a major portion of their attention to goods bought often, which have arate of price change that is less volatile as compared to the goods bought lessoften and thus better match the households’ expectations in the survey data.

Knowledge of which mechanisms cause inflation expectations to changemay assist central banks in communicating and conducting policy in an effi-

3The average household expected the annual rate of inflation to be 2.4% over the time periodJanuary 2002 - April 2017, while the average general rate of inflation over the same time periodis 1.2% as measured by the CPI. This observation is by no means unique to Sweden: simi-lar patterns have been found in previous research. For instance, Coibion and Gorodnichenko(2015b) and Ehrmann et al. (2017) document that the inflation expectations of US householdsare considerably higher than the actual CPI inflation outcomes over the time period 2009-2011.Berge (2018) finds that US households over-predicted realized inflation by nearly 1% over thetime period 2001-2015.

3

cient manner. One implication of my model is that an increase in the rate ofinflation mainly driven by changes in the prices of goods that households tendto purchase often will have a greater impact on households’ expectations ofthe future rate of inflation, as compared to an increase which is mainly drivenby changes in the prices of goods that households do not buy so often.

In Essay II, I instead examine whether the monetary policy maker is able toaffect households’ inflation expectations. Specifically, I examine empiricallywhether households alter their inflation expectations in response to monetarypolicy rate announcements over the time period 2003-2015. I use survey dataof the inflation expectations of Swedish households, collected in small in-tervals before and after 27 policy rate announcements made by the SwedishCentral Bank, the Riksbank. Since households may anticipate the announcedchanges, I use an instrumental variable approach. The announced policy ratechanges are instrumented using a monetary surprise variable, obtained fromSandström (2018), of the unexpected component of the change in the policyrate. The monetary policy surprise variable is based on high-frequency swaptrade data for a narrow time window around the policy rate announcements.

I find that the effect of an announced increase in the policy rate on inflationexpectations is significant and positive, i.e., in the opposite direction as com-pared to the prediction of a standard New-Keynesian model with moderatelypersistent monetary policy shocks. This result may be interpreted in severalways. The policy announcement may signal the central bank’s private infor-mation on the direction of future inflation. To examine if this interpretationmay explain the results, I divide the observations of the surprises associatedwith the announcements into those which are mainly monetary policy drivenor information driven, following a method developed by Jarocinski and Karadi(2020). Using observations of only one type of surprise, I find that the effectof an announced increase in the policy rate on inflation expectations is signifi-cant and positive only for the latter type of surprise, i.e., information surprises.This result is in favor of the interpretation that the Riksbank is revealing pri-vate information via its announcements.

I also examine whether the effects of the announcements on inflation ex-pectations differ across different types of households. I find that the effectappears to be stronger for those aged 35-49, with low or middle income levels,and with a secondary education. These results may be interpreted as sayingthat the households that are affected the most by policy rate changes, e.g., dueto sizeable mortgages, also respond more strongly to the announcements.

Wealth inequalityWealth is most commonly defined as the market value of all assets4 ownedby an individual net of his/her debts (Saez and Zucman, 2016). The most

4Assets typically include both financial and non-financial assets as well as pension wealth.

4

reliable data sources with respect to wealth holdings are administrative datarecords of wealth tax returns. However, these are in general not available aswealth is typically not taxed to the same extent as e.g., income flows (Roineand Waldenström, 2015).5 Instead, the most commonly used data originatefrom estimates based on estate tax returns or capital incomes, surveys, andjournalistic rich lists (Davies and Shorrocks, 2000). However, these types ofmeasures may be error ridden or skewed, e.g., due to under-reporting in surveydata at the top of the distribution.

Table 1. Top 1% wealth shares of Swedish wealth distribution 1990-2012Data type & source Year Top 1%Survey data, 1990 19.5Jansson (2000) 1997 20.3

2000 20.82001 19.32002 18.52003 19.12004 18.82005 19.4

Register data, 2006 19.4Lundberg and Waldenström (2018) 2007 17.4

2008 17.92009 21.72010 20.9

Estimates, 2011 20.8Lundberg and Waldenström (2018) 2012 21.5Note: The table shows the wealth held by the top 1% share of theSwedish wealth distribution. The data are obtained from Jansson(2000) (1990-1997), Lundberg and Waldenström (2018) (2000-2007 and 2008-2012).

The empirical evidence available suggests that global wealth inequality hasundergone large changes over the last few decades; see, Hubmer et al. (2020).However, the recent development in wealth is diverse across countries. Forinstance, Lundberg and Waldenström (2018) find that the wealth concentrationover the period 2007-2012 has remained stable in Germany, while it increasedby a small amount in the US, and increased substantially in Sweden. However,

5There are a few exceptions where administrative data of wealth are continuously available. Forinstance, Norway has administrative data records of individual wealth holdings dating back to1993. In Sweden a wealth tax was levied until 2007, and administrative data records of reportedwealth are available over the period 1999 – 2007.

5

for Sweden, the evolution of wealth over a longer time period, 1990-2012, hasnot been uniform, as is shown in Table 1.6

The divergence in the evolution of wealth inequality within countries acrossyears, as well as across countries over time, motivates the question of whichare the mechanisms that cause the wealth distribution to change over time.Recent research has identified changes in the tax system as one important fac-tor that affects the evolution of both income and wealth inequality (see, e.g.,Hubmer et al., 2020, Kaymak and Poschke, 2016, Jäntti et al., 2010).

In Essay III, joint with Charlotte Paulie and Markus Ridder, we examinethe effect on wealth inequality of a change in the tax system, namely, a changefrom a dual to a comprehensive tax system. In a comprehensive tax system,capital and labor income are taxed jointly, while in a dual tax system, capital istaxed separately at a relatively low proportional tax rate. The Nordic countrieswere pioneers in adopting dual tax systems at the beginning of the 1990s.Since then, several other European countries have introduced features of adual income taxation system (see, e.g., Cnossen, 2018, Eggert and Genser,2005).

We use a quantitative model to examine the effect on wealth inequality ofa dual tax reform. We start out from a standard open-economy incomplete-markets model, to which we add an entrepreneurial sector based on Cagettiand De Nardi (2006). After the reform, entrepreneurs may exploit the dualityof the tax system by choosing to declare income as capital (taxed at a flat rate),rather than as labor income (taxed progressively). The model is parameterizedto match the characteristics of the Swedish economy. Our data cover the entireSwedish population for the period 1999-2007. We use these data to estimatethe parameters of the stochastic process for entrepreneurial income.

Our findings show that, on the one hand, a dual tax system encouragesentrepreneurship and increases aggregate capital due to the reduction of thecapital income tax. These were also intended effects of the Swedish dualtax reform. On the other hand, the concentration of wealth at the top of thedistribution increases, as wealth is mainly accumulated by entrepreneurs whowere already concentrated at the top of the distribution.

6Due to the lack of register data over longer time periods, the data source varies over the periodconsidered. For 1990-1997, survey data estimates obtained from Jansson (2000) are shown. InJansson (2000), Statistics Sweden has calculated estimates of individual asset and debt holdingsbased on survey data, for years with varying intervals over the time period 1975-1997 (here,the starting year is 1990 as this is the starting year in focus in this thesis). The estimatesaim at reflecting the net market value of agents’ assets and debts (see Jansson (2000) for adetailed description of the survey and for the calculation of individual wealth holdings). Forthe years 2000-2007, register data records are shown which are obtained from Lundberg andWaldenström (2018). For the years 2008-2012, estimates from Lundberg and Waldenström(2018) are shown (see Lundberg and Waldenström (2018) for a description of the estimationmethod they have used).

6

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