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The Formation Of Consumer Inflation Expectations: New Evidence From Japan'S Deflation Experience

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  • Jess Diamond
  • Kota Watanabe
  • Tsutomu Watanabe

Abstract

Using a new data set, we investigate the relationship between the inflation experience and expectations of households in Japan, focusing on the post‐1995 deflationary era. Our first finding is that inflation expectations increase with age. Second, we find that measured inflation rates also increase with age, although age and inflation expectations continue to exhibit a positive correlation even after controlling for the household‐level inflation rate. Analysis suggests that the correlation between age and inflation expectations is driven largely by the correlation between cohort and inflation expectations, which we interpret to represent the effect of historical inflation experience on inflation expectations.

Suggested Citation

  • Jess Diamond & Kota Watanabe & Tsutomu Watanabe, 2020. "The Formation Of Consumer Inflation Expectations: New Evidence From Japan'S Deflation Experience," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(1), pages 241-281, February.
    • Handle: RePEc:wly:iecrev:v:61:y:2020:i:1:p:241-281
    DOI: 10.1111/iere.12423
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    Cited by:

    1. Demgensky, Lisa & Fritsche, Ulrich, 2023. "Narratives on the causes of inflation in Germany: First results of a pilot study," WiSo-HH Working Paper Series 77, University of Hamburg, Faculty of Business, Economics and Social Sciences, WISO Research Laboratory.
    2. Niizeki, Takeshi & Hori, Masahiro, 2023. "Inflation expectations and household expenditure: Evidence from pseudo-panel data in Japan," Journal of Economic Behavior & Organization, Elsevier, vol. 214(C), pages 308-324.
    3. Gunji, Hiroshi, 2024. "Impact of the Kuroda Bazooka on Japanese households’ borrowing intentions," Japan and the World Economy, Elsevier, vol. 69(C).
    4. Olegs Krasnopjorovs, 2022. "Whether Low-Income Households and Retirees Face Higher Inflation? Evidence from Latvia," Post-Print hal-03861129, HAL.
    5. Kikuchi, Junichi & Nagao, Ryoya & Nakazono, Yoshiyuki, 2023. "Expenditure responses to the COVID-19 pandemic," Japan and the World Economy, Elsevier, vol. 65(C).
    6. Fructuoso Borrallo Egea & Pedro del Río López, 2021. "Monetary policy strategy and inflation in Japan," Occasional Papers 2116, Banco de España.
    7. Abildgren, Kim & Kuchler, Andreas, 2021. "Revisiting the inflation perception conundrum," Journal of Macroeconomics, Elsevier, vol. 67(C).
    8. Junichi Kikuchi & Yoshiyuki Nakazono, 2023. "The Formation of Inflation Expectations: Microdata Evidence from Japan," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(6), pages 1609-1632, September.
    9. Carlos Medel, 2021. "Searching for the Best Inflation Forecasters within a Consumer Perceptions Survey: Microdata Evidence from Chile," Working Papers Central Bank of Chile 899, Central Bank of Chile.
    10. John Duffy, 2022. "Why macroeconomics needs experimental evidence," The Japanese Economic Review, Springer, vol. 73(1), pages 5-29, January.
    11. Yusuke Takahashi & Yoichiro Tamanyu, 2022. "Households' Perceived Inflation and CPI Inflation: the Case of Japan," Bank of Japan Working Paper Series 22-E-1, Bank of Japan.
    12. Kozo UEDA, 2024. "Inflation Expectations and Spending: Evidence from an Experiment and Bank Transaction Data in Japan," CIGS Working Paper Series 24-021E, The Canon Institute for Global Studies.
    13. Toshitaka Sekine & Frank Packer & Shunichi Yoneyama, 2022. "Individual Trend Inflation," IMES Discussion Paper Series 22-E-14, Institute for Monetary and Economic Studies, Bank of Japan.
    14. Bańnkowska, Katarzyna & Borlescu, Ana Maria & Charalambakis, Evangelos & Da Silva, António Dias & Di Laurea, Davide & Dossche, Maarten & Georgarakos, Dimitris & Honkkila, Juha & Kennedy, Neale & Kenny, 2021. "ECB Consumer Expectations Survey: an overview and first evaluation," Occasional Paper Series 287, European Central Bank.

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