Inflation and Deflationary Biases in Inflation Expectations

53 Pages Posted: 25 Jun 2019

See all articles by Michael J. Lamla

Michael J. Lamla

ETH Zurich - KOF Swiss Economic Institute; University of Essex

Damjan Pfajfar

Board of Governors of the Federal Reserve System

Lea Rendell

University of Maryland

Multiple version iconThere are 2 versions of this paper

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

Lamla, Michael J. and Pfajfar, Damjan and Rendell, Lea, Inflation and Deflationary Biases in Inflation Expectations (June 18, 2019). BIS Working Paper No. 789. Available at SSRN: https://ssrn.com/abstract=3409903

Michael J. Lamla (Contact Author)

ETH Zurich - KOF Swiss Economic Institute ( email )

Zurich
Switzerland

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Damjan Pfajfar

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Lea Rendell

University of Maryland ( email )

College Park
College Park, MD 20742
United States

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