Inflation and Deflationary Biases in Inflation Expectations
52 Pages Posted: 25 Jul 2019 Last revised: 21 Oct 2019
Date Written: June, 2019
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.
JEL Classification: E58, E31, D84, E37
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