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The Formation of Consumer Inflation Expectations: New Evidence From Japan's Deflation Experience

Listed author(s):
  • Jess Diamond

    (Department of Economics, Hosei University)

  • Kota Watanabe

    (CIGS and University of Tokyo)

  • Tsutomu Watanabe

    (Graduate School of Economics, University of Tokyo)

Registered author(s):

    Using a new micro-level dataset we investigate the relationship between the inflation experience and inflation expectations of individuals in Japan. We focus on the period after 1995, when Japan began its era of deflation. Our key findings are fourfold. Firstly, we find that inflation expectations tend to increase with age. Secondly, we find that measured inflation rates of items purchased also increase with age. However, we find that age and inflation expectations continue to have a positive correlation even after controlling for the individual-level rate of inflation. Further analysis suggests that the positive correlation between age and inflation expectations is driven to a signi cant degree by the correlation between cohort and inflation expectations, which we interpret to represent the effect of historical inflation experience on expectations of future inflation rates.

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    File URL: http://www.carf.e.u-tokyo.ac.jp/pdf/workingpaper/fseries/F388.pdf
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    Paper provided by Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-388.

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    Length: 56 pages
    Date of creation: Jul 2016
    Handle: RePEc:cfi:fseres:cf388
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