The Formation of Consumer Inflation Expectations: New Evidence From Japan's Deflation Experience
Kota Watanabe and
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Jess Diamond: Department of Economics, Hosei University
Kota Watanabe: Canon Institute for Global Studies (GIGS) and University of Tokyo
Tsutomu Watanabe: Graduate School of Economics, University of Tokyo
No CARF-F-442, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo
Using a new micro-level dataset we investigate the relationship between the inflation experience and inflation expectations of households in Japan. We focus on the period after 1995, when Japan began its era of deflation. Our key findings are fourfold. Firstly, we find that inflation expectations tend to increase with age. Secondly, we find that measured inflation rates of items purchased also increase with age. However, we find that age and inflation expectations continue to have a positive correlation even after controlling for the household-level rate of inflation. Further analysis suggests that the positive correlation between age and inflation expectations is driven to a significant degree by the correlation between cohort and inflation expectations, which we interpret to represent the effect of historical inflation experience on expectations of future inflation rates.
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