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

Michael Lamla, Damjan Pfajfar and Lea Rendell

No 24-26, Working Papers from Federal Reserve Bank of Cleveland

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 (search for similar items in EconPapers)
JEL-codes: D84 E31 E37 E58 (search for similar items in EconPapers)
Pages: 80
Date: 2024-11-21
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
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DOI: 10.26509/frbc-wp-202426

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