Inflation and Deflationary Biases in Inflation Expectations
53 Pages Posted: 25 Jun 2019
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Inflation and Deflationary Biases in Inflation Expectations
Inflation and Deflationary Biases in Inflation Expectations
Date Written: June 18, 2019
Abstract
We explore the consequences of losing confidence in the price-stability objective of central banks by quantifying the inflation and deflationary biases in inflation expectations. In a model with an occasionally binding zero-lower-bound constraint, we show that both inflation bias and deflationary bias can exist as a steady-state outcome. We assess the predictions of this model using unique individual-level inflation expectations data across nine countries that allow for a direct identification of these biases. Both inflation and deflationary biases are present and sizable, but different across countries. Even among the euro-area countries, perceptions of the European Central Bank's objectives are very distinct.
Keywords: inflation bias, deflationary bias, confidence in central banks, trust, effective lower bound, inflation expectations, microdata
JEL Classification: E31, E37, E58, D84
Suggested Citation: Suggested Citation