DP16729 Zero Lower Bound on Inflation Expectations
|Author(s):||Yuriy Gorodnichenko, Dmitriy Sergeyev|
|Publication Date:||November 2021|
|Keyword(s):||Inflation expectations, non-rational beliefs, survey data|
|JEL(s):||E5, E7, G4|
|Programme Areas:||International Macroeconomics and Finance, Monetary Economics and Fluctuations|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=16729|
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.