Inflation and Deflationary Biases in Inflation Expectations
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.
File(s): File format is application/pdf https://www.federalreserve.gov/econres/feds/files/2019042pap.pdf
Part of Series: Finance and Economics Discussion Series
Publication Date: 2019-06-03
Pages: 52 pages