Inflation and Deflationary Biases in the Distribution of Inflation Expectations: Theory and Empirical Evidence from Nine Countries

We explore the consequences of losing confidence in the price stability objective of central banks by studying the resulting inflation and deflationary biases in medium-run inflation expectations. In a model with heterogeneous household perceptions of an occasionally binding zero-lower-bound constraint and of monetary policy objectives, we show that the estimated model-implied distribution of households' inflation expectations matches several characteristics of the empirical distribution when featuring both inflation and deflationary biases. We then directly identify these biases using unique individual-level survey data on medium-run inflation expectations across nine countries and over time. Both inflation and deflationary biases are important features of the distribution of medium-run inflation expectations.