The Association Between Time Discounting, Hyperbolic Discounting, and Inflation Expectations: Evidence from Large-Scale Survey Data

Inflation expectations play a central role in monetary policy effectiveness, yet relatively little is known about how individual behavioral traits shape expectation formation. This study examines whether time discounting and hyperbolic discounting, key dimensions of intertemporal preferences, are systematically associated with household inflation expectations. Using large-scale survey data from Japan that elicit both time preference measures and qualitative inflation expectations, we analyze expectations over one-, three-, and five-year horizons. The empirical analysis employs ordered probit models that fit well with the categorical nature of survey-based inflation expectations and controls for a rich set of demographic, socioeconomic, and behavioral characteristics, including financial literacy and risk preferences. The results reveal clear horizon-dependent patterns. Hyperbolic discounting is positively associated with short-term inflation expectations, suggesting that present-biased individuals place greater weight on recent inflation developments. In contrast, higher time discount rates are associated with higher inflation expectations at medium and longer horizons, indicating that impatience is more relevant for beliefs about distant future prices. These findings provide novel evidence on the behavioral micro-foundations of inflation expectation formation and highlight the importance of heterogeneity in time preferences. From a policy perspective, the results suggest that one-size-fits-all communication strategies may be insufficient and that effective expectation management may require tailoring messages to account for differences in individuals’ time orientation across forecast horizons.