Working Paper: NBER ID: w29496
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 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. A confidence-driven liquidity trap steady state with deflation does not exist.
Keywords: Inflation Expectations; Zero Lower Bound; Macroeconomic Dynamics
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 |
|---|---|
| Zero Lower Bound (ZLB) on inflation expectations (E31) | Households do not expect deflation (D19) |
| ZLB on inflation expectations (E31) | Alters the effectiveness of monetary policy (E52) |
| ZLB on inflation expectations (E31) | Prevents confidence-driven liquidity trap steady state with deflation (E31) |
| Households do not expect deflation (D19) | Weakens the effectiveness of forward guidance (E43) |
| Inflation expectations are asymmetric (D84) | Households predict inflation rates significantly above targets (D19) |