Social Learning and Monetary Policy at the Effective Lower Bound
79 Pages Posted: 19 Jan 2021 Last revised: 26 Feb 2024
Date Written: August 25, 2023
This paper develops a model that jointly accounts for the missing disinflation in the wake of the Great Recession and the subsequently observed inflation-less recovery. The key mechanism works through heterogeneous expectations that may durably lose their anchoring to the central bank (CB)’s target and coordinate on particularly persistent below-target paths. The welfare cost associated with persistent low inflation may be reduced if the CB announces to the agents its target or its own inflation forecasts, as communication helps coordinate expectations. However, the CB may lose its credibility whenever its announcements become decoupled from actual inflation.
Keywords: Inflation Targeting, Heterogeneous Expectations, Effective Lower Bound, Communication
JEL Classification: E32, E52, E70, C82
Suggested Citation: Suggested Citation