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

August 19, 2019
Jess Diamond*1
Kota Watanabe*2
Tsutomu Watanabe*3


Using a new micro-level dataset we investigate the relationship between the inflation experience and inflation expectations of households 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 household-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.

Inflation Expectations, Deflation, Monetary Policy, Household Level Inflation Data, Japan

We thank Anil Kashyap, Nobuhiro Kiyotaki, Edward Lazear, James Poterba, Stephen Redding, David Weinstein and participants of the 2016 NBER Japan Project Meeting in Tokyo, Japan. We also thank participants of the 8th CARF-BOJ Joint Conference on Issues Concerning Recent Inflation Dynamics: The Experience of Japan. This research forms part of the project on "Central Bank Communication Design" funded by a JSPS Grant-in-Aid for Scientific Research (No. 18H05217).

  1. *1Department of Economics, Hosei University
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  2. *2Canon Institute for Global Studies and University of Tokyo
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  3. *3Graduate School of Economics, University of Tokyo
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