Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/250514 
Year of Publication: 
2021
Series/Report no.: 
IZA Discussion Papers No. 14853
Publisher: 
Institute of Labor Economics (IZA), Bonn
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 possibil- ity. 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 guid- ance, 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.
Subjects: 
inflation expectations
non-rational beliefs
survey data
JEL: 
E5
E7
G4
Document Type: 
Working Paper

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