Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/240661 
Year of Publication: 
2018
Series/Report no.: 
Working Papers No. 2018-20
Publisher: 
Banco de México, Ciudad de México
Abstract: 
Our interest is to understand the costs of deflation. Thus, we explore the extent to which deflationary risks have surged in a selected set of European economies. To that end, we develop a simple consumption-based asset pricing model and, based on it, we estimate a(n) (in)deflation risk premium. We find that our aggregate risk premium and a systemic financial stress indicator correlate negatively. The absolute values of their (time-averaged) risk premiums and their financial development indices correlate as well. Both relations are in line with our model. In addition, we estimate panel data regressions to explore the extent to which changes in the price and debt levels, are priced in by the (in)deflation risk premium. We generally find that deflation terms contributes negatively to such a premium and inflation positively. The magnitudes of the coefficients associated with deflation tend to be greater, compared to those associated with inflation. This suggests that deflationary costs are relatively larger than inflationary ones. We rationalize this cost asymmetry with the presence of a credit constraint under deflationary periods.
Subjects: 
Consumption-based asset pricing
Inflation
Deflation
Inflation Risk Premium
Deflation Risk Premium
Eurozone
JEL: 
G12
E31
Document Type: 
Working Paper
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