Discussion Paper Details

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Title: Zero Lower Bound on Inflation Expectations

Author(s): Yuriy Gorodnichenko and Dmitriy Sergeyev

Publication Date: November 2021

Keyword(s): Inflation expectations, non-rational beliefs and survey data

Programme Area(s): International Macroeconomics and Finance and Monetary Economics and Fluctuations

Abstract: We document a new fact: in U.S., European and Japanese surveys, households do not expect deflation, even in environments where persistent deflation is a strong possibility. This fact stands in contrast to the standard macroeconomic models with rational expectations. We extend a standard New Keynesian model with a zero-lower bound on inflation expectations. Unconventional monetary policies, such as forward guidance, are weaker. In liquidity traps, the government spending output multiplier is finite, and adverse aggregate supply shocks are not expansionary. The possibility of confidence-driven liquidity traps is attenuated.

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Bibliographic Reference

Gorodnichenko, Y and Sergeyev, D. 2021. 'Zero Lower Bound on Inflation Expectations'. London, Centre for Economic Policy Research.