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Disagreeing during Deflations

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  • RYAN BANERJEE
  • AARON MEHROTRA

Abstract

We examine inflation forecast disagreement during periods of deflation. Using a large cross‐country data set of professional forecasters’ expectations, we show that the relationship between inflation outcomes and forecast disagreement is U‐shaped: disagreement rises with both positive and negative inflation outcomes. We show that information frictions do not explain rising disagreement in deflations and other macroeconomic factors that generally tend to correlate with forecast disagreement cannot fully explain its increase. Instead, our results are consistent with forecasters having heterogeneous views about the inflation process, with those in the left‐tail of the forecast distribution shifting downward during deflations. Econometric evidence indicates that such shifts have adverse consequences for real activity.

Suggested Citation

  • Ryan Banerjee & Aaron Mehrotra, 2021. "Disagreeing during Deflations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(7), pages 1867-1885, October.
    • Handle: RePEc:wly:jmoncb:v:53:y:2021:i:7:p:1867-1885
    DOI: 10.1111/jmcb.12782
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    1. Alessandro Barbera & Dora Xia & Sonya Zhu, 2023. "The term structure of inflation forecasts disagreement and monetary policy transmission," BIS Working Papers 1114, Bank for International Settlements.

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