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

Author

Listed:
  • Jess Diamond

    (Hitotsubashi University,)

  • Kota Watanabe

    (CIGS and University of Tokyo)

  • Tsutomu Watanabe

    (University of Tokyo)

Abstract

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 significant 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.

Suggested Citation

  • Jess Diamond & Kota Watanabe & Tsutomu Watanabe, 2016. "The Formation of Consumer Inflation Expectations:Evidence From Japan's Deflation Experience," UTokyo Price Project Working Paper Series 067, University of Tokyo, Graduate School of Economics.
    • Handle: RePEc:upd:utppwp:067
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    References listed on IDEAS

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    Cited by:

    1. Li, Shaoyu & Wei, Lijia & Xu, Zhiwei, 2017. "Dynamic asset allocation and consumption under inflation inequality: The impacts of inflation experiences and expectations," Economic Modelling, Elsevier, vol. 61(C), pages 113-125.

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    Keywords

    Inflation Expectations; Deflation; Monetary Policy; Panel Data; Japan;
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