Downward Rigidity in Households’ Price Expectations : An Analysis Based on the Bank of Japan's 'Opinion Survey on the General Public's Views and Behavior'

This paper investigates the characteristics of households' inflation expectations using the micro‐data of the Opinion Survey on the General Public's Views and Behavior conducted by the Bank of Japan. The results of the Kahn test indicate the existence of strong downward rigidity in households' price expectations. One consequence of this downward rigidity is that survey answers strongly react to shocks to inflation expectations in a high inflation environment, but only weakly in a low inflation environment. Furthermore, this downward rigidity may hide potential links between inflation expectations and other economic indicators and may produce spurious correlations between them. To overcome these problems, this paper adjusts the distribution of survey answers on inflation expectations for downward rigidity. Using this adjusted distribution, the paper examines the relationships between households' inflation expectations and their views on various economic issues. The main results are as follows. From the end of 2005 onward, a negative correlation between households' inflation expectations and their outlook for economic conditions can be observed. Regarding the activities of the Bank of Japan, the following relationships can be observed from 2006. First, the more strongly households are interested in the Bank's activities, the more stable are their inflation expectations. And second, the more confidence households have in the Bank, the more tightly are their inflation expectations anchored