Inflation and Deflationary Biases in the Distribution of Inflation Expectations: Theory and Empirical Evidence from Nine Countries

RePEc Short ID: ppf8
ORCID iD: 0000-0001-7737-0470

Lamla, Michael J.; Pfajfar, Damjan; Rendell, Lea

doi:10.26509/frbc-wp-202426

Working Paper

Inflation and Deflationary Biases in the Distribution of Inflation Expectations: Theory and Empirical Evidence from Nine Countries

Abstract: We explore the consequences of losing confidence in the price stability objective of central banks by studying the resulting inflation and deflationary biases in medium-run inflation expectations. In a model with heterogeneous household perceptions of an occasionally binding zero-lower-bound constraint and of monetary policy objectives, we show that the estimated model-implied distribution of households' inflation expectations matches several characteristics of the empirical distribution when featuring both inflation and deflationary biases. We then directly identify these biases using unique individual-level survey data on medium-run inflation expectations across nine countries and over time. Both inflation and deflationary biases are important features of the distribution of medium-run inflation expectations.

Keywords: inflation bias; deflationary bias; confidence in central banks; effective lower bound; inflation expectations; microdata;

JEL Classification: E31; E37; E58; D84;

https://doi.org/10.26509/frbc-wp-202426