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Inflation and Deflationary Biases in Inflation Expectations

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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.

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  • Michael J. Lamla & Damjan Pfajfar & Lea Rendell, 2019. "Inflation and Deflationary Biases in Inflation Expectations," Finance and Economics Discussion Series 2019-042, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2019-42
    DOI: 10.17016/FEDS.2019.042
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    Cited by:

    1. Corsello, Francesco & Neri, Stefano & Tagliabracci, Alex, 2021. "Anchored or de-anchored? That is the question," European Journal of Political Economy, Elsevier, vol. 69(C).
    2. Mridula Duggal & Luis Rojas, 2023. "Optimal Disinflation with Delegation and Limited Credibility," Working Papers 1401, Barcelona School of Economics.
    3. Meinerding, Christoph & Poinelli, Andrea & Schüler, Yves, 2022. "Inflation expectations and climate concern," Discussion Papers 12/2022, Deutsche Bundesbank.
    4. Lena Dräger & Klaus Gründler & Niklas Potrafke, 2022. "Political Shocks and Inflation Expectations: Evidence from the 2022 Russian Invasion of Ukraine," ifo Working Paper Series 371, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    5. Abildgren, Kim & Kuchler, Andreas, 2021. "Revisiting the inflation perception conundrum," Journal of Macroeconomics, Elsevier, vol. 67(C).

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    More about this item

    Keywords

    zero lower bound (ZLB); Confidence in Central Banks; Deflationary Bias; Inflation Bias; Inflation Expectations; Microdata;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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