Inflation and Deflationary Biases in Inflation Expectations

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

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

doi:10.17016/FEDS.2019.042

Working Paper

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.

Keywords: zero lower bound (ZLB); Confidence in Central Banks; Deflationary Bias; Inflation Bias; Inflation Expectations; Microdata;

JEL Classification: E58; E31; D84; E37;

https://doi.org/10.17016/FEDS.2019.042