Mirko Wiederholt (Goethe University Frankfurt): Empirical properties of inflation expectations and the zero lower bound

Mirko Wiederholt (Goethe University Frankfurt): Empirical properties of inflation expectations and the zero lower bound

Abstract

Survey inflation expectations adjust slowly after shocks and are heterogeneous. The paper therefore solves a New Keynesian model with dispersed information on the household side. The information friction changes results regarding shock propagation and policy effectiveness at the zero lower bound on nominal interest rates. The deflationary spiral in bad states of the world takes off slowly. Communication about the aggregate state affects consumption (and the sign of this effect reverses when the zero lower bound binds). Forward guidance and fiscal policy are less powerful. The effects of dispersed information are larger in states with a smaller prior probability.

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