Research Seminar - Damjan Pfajfar (Federal Reserve Board) - Inflation and Deflationary Biases in Inflation Expectations

Damjan Pfajfar (Federal Reserve Board) - Inflation and Deflationary Biases in Inflation Expectations

Co-authors: Michael Lamla (University of Essex and ETH Zurich, KOF Swiss Economic Institute) and Lea Rendell (University of Maryland)

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 households have heterogeneous inflation expectations in the steady state that can feature both inflation bias and deflationary bias. We test the predictions of this model empirically using unique individual-level medium-run inflation expectations survey data across nine countries and over time that allows for direct identification of these biases. Both inflation and deflationary biases are present and sizable.

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