Inflation and Deflationary Biases in Inflation Expectations

53 Pages Posted: 25 Jun 2019

See all articles by Michael J. Lamla

Michael J. Lamla

University of Essex; ETH Zurich - KOF Swiss Economic Institute

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 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)

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

ETH Zurich - KOF Swiss Economic Institute ( email )

Zurich
Switzerland

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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