Working Paper: CEPR ID: DP16729
Authors: Yuriy Gorodnichenko; Dmitriy Sergeyev
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; nonrational beliefs; survey data
JEL Codes: E5; E7; G4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ZLB on inflation expectations (E31) | household inflation expectations (D19) |
| household experiences (D10) | household inflation expectations (D19) |
| absence of deflationary expectations (E31) | risk of deflationary spirals (E31) |
| ZLB on inflation expectations (E31) | effectiveness of forward guidance (E60) |
| household inflation expectations (D19) | macroeconomic dynamics (E19) |