TY - UNPB

T1 - Inflation and Deflationary Biases in Inflation Expectations

AU - Lamla, Michael J.

AU - PJaifar, Damian

AU - Rendell, Lea

PY - 2019/6/18

Y1 - 2019/6/18

N2 - FocusWe use novel, individual-level survey data across several countries to quantify inflation and deflationary biases in inflation expectations that emerge due to a loss in confidence in the central bank's price objective.ContributionWe develop a model that can accommodate both inflation and deflationary biases, and then test the model's prediction using the survey data. The model lets us dissect country-level results on inflation and deflationary bias and interpret them as a result of different perceptions of the target level of the output gap or different relative weights attached to output and inflation in the perception of the central bank's loss function. This feature is particularly useful for evaluating the differences in perceptions within the European monetary union.FindingsOur results show that both inflation and deflationary biases are present and sizeable. For our sample of countries, we find that those that pursue inflation targeting have lower inflation expectations as well as lower dispersion of inflation expectations. However, our results also show that the deflationary bias may become even larger under an inflation targeting regime. Our results reveal substantial differences among European monetary union countries in terms of their perceptions of the ECB's objective function. The perception of the target level of the output gap, for example, is highest in Italy. The differences among other countries are mostly driven by the different relative weights attached to output and inflation. These results indicate that the ECB faces an ongoing challenge in convincing households of their objectives.

AB - FocusWe use novel, individual-level survey data across several countries to quantify inflation and deflationary biases in inflation expectations that emerge due to a loss in confidence in the central bank's price objective.ContributionWe develop a model that can accommodate both inflation and deflationary biases, and then test the model's prediction using the survey data. The model lets us dissect country-level results on inflation and deflationary bias and interpret them as a result of different perceptions of the target level of the output gap or different relative weights attached to output and inflation in the perception of the central bank's loss function. This feature is particularly useful for evaluating the differences in perceptions within the European monetary union.FindingsOur results show that both inflation and deflationary biases are present and sizeable. For our sample of countries, we find that those that pursue inflation targeting have lower inflation expectations as well as lower dispersion of inflation expectations. However, our results also show that the deflationary bias may become even larger under an inflation targeting regime. Our results reveal substantial differences among European monetary union countries in terms of their perceptions of the ECB's objective function. The perception of the target level of the output gap, for example, is highest in Italy. The differences among other countries are mostly driven by the different relative weights attached to output and inflation. These results indicate that the ECB faces an ongoing challenge in convincing households of their objectives.

KW - Economics

KW - inflation bias

KW - deflationary bias

KW - confidence in central banks

KW - trust

KW - ZLB

KW - inflation expectations

KW - microdata

M3 - Working papers

T3 - BIS Working Papers

BT - Inflation and Deflationary Biases in Inflation Expectations

PB - Bank for International Settlements - BIS

CY - Basel

ER -