Disagreeing during Deflations

Ryan Banerjee and Aaron Mehrotra

Journal of Money, Credit and Banking, 2021, vol. 53, issue 7, 1867-1885

Abstract: We examine inflation forecast disagreement during periods of deflation. Using a large cross‐country data set of professional forecasters’ expectations, we show that the relationship between inflation outcomes and forecast disagreement is U‐shaped: disagreement rises with both positive and negative inflation outcomes. We show that information frictions do not explain rising disagreement in deflations and other macroeconomic factors that generally tend to correlate with forecast disagreement cannot fully explain its increase. Instead, our results are consistent with forecasters having heterogeneous views about the inflation process, with those in the left‐tail of the forecast distribution shifting downward during deflations. Econometric evidence indicates that such shifts have adverse consequences for real activity.

Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:53:y:2021:i:7:p:1867-1885

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