Dispersed Inflation Expectations and the Zero Lower Bound

Mirko Wiederholt
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Mirko Wiederholt: Northwestern University

No 1071, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: Micro data on inflation expectations has two important properties: (i) there is substantial heterogeneity in inflation expectations across households, and (ii) the average inflation expectation responds slowly to shocks to actual inflation. This paper studies the effect of dispersed inflation expectations on dynamics at the zero lower bound. Following Eggertsson and Woodford (2003) and Christiano, Eichenbaum and Rebelo (2010), I study the effect of a temporary change in households' discount factor. The difference to these papers is that different households are hit by different discount factor shocks. Furthermore, households only observe their own discount factor shock and not the cross-sectional distribution of discount factor shocks in the population. Households infer from their own discount factor shock the distribution of discount factor shocks in the population. This creates dispersion in beliefs about the state of the economy. I study how this dispersion in beliefs affects dynamics at the zero lower bound.

Date: 2012
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