Zero Lower Bound on Inflation Expectations

Dmitriy Sergeyev and Yuriy Gorodnichenko

No 16729, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Inflation expectations; Non-rational beliefs; Survey data (search for similar items in EconPapers)
JEL-codes: E5 E7 G4 (search for similar items in EconPapers)
Date: 2021-11
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Working Paper: Zero Lower Bound on Inflation Expectations (2021)
Working Paper: Zero Lower Bound on Inflation Expectations (2021)
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