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

Author

Listed:
  • Ryan Banerjee

    (Bank for International Settlements)

  • Aaron Mehrotra

    (Bank for International Settlements)

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.

Suggested Citation

  • Ryan Banerjee & Aaron Mehrotra, 2023. "Unanticipated and Backward-Looking: Deflations and the Behavior of Inflation Expectations," International Journal of Central Banking, International Journal of Central Banking, vol. 19(4), pages 41-83, October.
    • Handle: RePEc:ijc:ijcjou:y:2023:q:4:a:2
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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