THE FORMATION OF CONSUMER INFLATION EXPECTATIONS: NEW EVIDENCE FROM JAPAN'S DEFLATION EXPERIENCE

Jess Diamond, Kota Watanabe and Tsutomu Watanabe

International Economic Review, 2020, vol. 61, issue 1, 241-281

Abstract: Using a new data set, we investigate the relationship between the inflation experience and expectations of households in Japan, focusing on the post‐1995 deflationary era. Our first finding is that inflation expectations increase with age. Second, we find that measured inflation rates also increase with age, although age and inflation expectations continue to exhibit a positive correlation even after controlling for the household‐level inflation rate. Analysis suggests that the correlation between age and inflation expectations is driven largely by the correlation between cohort and inflation expectations, which we interpret to represent the effect of historical inflation experience on inflation expectations.

Date: 2020
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