"Inflation and Deflationary Biases in Inflation Expectations"
We explore the consequences of losing conﬁdence in the price-stability objective of central banks by quantifying the inﬂation and deﬂationary biases in inﬂation expectations. In a model with an occasionally binding zero-lower-bound constraint, we show that an inﬂation bias as well as a deﬂationary bias exist as a steady-state outcome. We assess the predictions of this model using unique individual-level inﬂation expectations data across nine countries that allow for a direct identiﬁcation of these biases. Both inﬂation and deﬂationary biases are present (and sizable) in inﬂation expectations of these individuals. Among the euro-area countries in our sample, we can document signiﬁcant diﬀerences in perceptions of the European Central Bank’s objectives, despite having a common monetary policy.
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