Unanticipated and Backward-Looking: Deflations and the Behavior of Inflation Expectations

Ryan Banerjee and Aaron Mehrotra

International Journal of Central Banking, 2023, vol. 19, issue 4, 41-83

Abstract: We analyze the behavior of inflation expectations during periods of deflation using a large cross-country data set of professional forecasters’ expectations. We find that deflation episodes are largely unanticipated by forecasters and feature much larger forecast errors than periods of high inflation rates. Furthermore, inflation expectations become more backwardlooking during deflations, especially among forecasters that are pessimistic about growth. The results have implications for a risk-management approach to monetary policy when an economy faces very low inflation.

JEL-codes: E31 E58 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:ijc:ijcjou:y:2023:q:4:a:2

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