Zero Lower Bound on Inflation Expectations

61 Pages Posted: 23 Nov 2021 Last revised: 7 Feb 2022

See all articles by Yuriy Gorodnichenko

Yuriy Gorodnichenko

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Dmitriy Sergeyev

Bocconi University

Multiple version iconThere are 2 versions of this paper

Date Written: November 2021

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.

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Suggested Citation

Gorodnichenko, Yuriy and Sergeyev, Dmitriy, Zero Lower Bound on Inflation Expectations (November 2021). NBER Working Paper No. w29496, Available at SSRN: https://ssrn.com/abstract=3968719

Yuriy Gorodnichenko (Contact Author)

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

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Dmitriy Sergeyev

Bocconi University ( email )

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Milan, MI 20136
Italy

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