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Evaluating two new survey datasets of German consumers, we test whether individual
consumption spending decisions are formed according to an Euler equation
derived from consumption life-cycle models. Measured in qualitative individual
changes, our results suggest that current and planned spending are positively correlated,
thus supporting the hypothesis of consumption smoothing. Also, current
spending is positively correlated with inflation expectations, and negatively with
nominal interest rate expectations. Interestingly, the effect of perceived real interest
rates is only significant for financial market participants, financially unconstrained
households and those with high financial literacy, implying that these are important
conditions for the ability to smooth consumption over time. Moreover, these households
are better positioned in the wealth and income distributions. In that sense,
the ability to smooth consumption may be a channel through which distributional
effects of policy shocks may occur. Finally, news on inflation and monetary policy
observed by the consumer strengthen the effect of their inflation expectations on
current spending, suggesting that imperfect information may also influence the Euler
equation relationship.
