Inflation and Deflationary Biases in Inflation Expectations

52 Pages Posted: 25 Jul 2019 Last revised: 21 Oct 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: 2019-06-03

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 an inflation bias as well as a deflationary bias 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) in inflation expectations of these individuals. Among the euro-area countries in our sample, we can document significant differences in perceptions of the European Central Bank’s objectives, despite having a common monetary policy.

Keywords: ZLB, Confidence in Central Banks, Deflationary Bias, Inflation Bias, Inflation Expectations, Microdata

JEL Classification: E58, E31, D84, E37

Suggested Citation

Lamla, Michael J. and Pfajfar, Damjan and Rendell, Lea, Inflation and Deflationary Biases in Inflation Expectations (2019-06-03). FEDS Working Paper No. 2019-042. Available at SSRN: https://ssrn.com/abstract=3423248 or http://dx.doi.org/10.17016/FEDS.2019.042

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

Register to save articles to
your library

Register

Paper statistics

Downloads
10
Abstract Views
52
PlumX Metrics