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.
Authors
- Acknowledgements & Disclosure
- We thank Davide Businelli and Bernardo Candia for outstanding research assistance. We thank Philippe Andrade, Carola Binder, Seung Joo Lee, Michael Weber, Francesco Zanetti, and seminar participants at Berkeley, Bocconi, Oxford, and PSE for comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- DOI
- https://doi.org/10.3386/w29496
- Published in
- United States of America
