Events at CERGE-EI

Prof. Mirko Wiederholt

Goethe University, Frankfurt am Main, Germany

Author: Mirko Wiederholt

Abstract: Survey data on expectations shows that households have heterogeneous inflation expectations and households’ inflation expectations respond sluggishly to realized shocks to future inflation. By contrast, in models with a zero lower bound currently used for monetary and fiscal policy analysis, households’ inflation expectations are neither heterogeneous nor sticky. This paper therefore solves a New Keynesian model with a zero lower bound and dispersed information on the side of households. The main properties of the model with heterogeneous and sticky inflation expectations are as follows: (1) the deflationary spiral in bad states of the world is less severe than under perfect information, (2) communication by the central bank about the current state of the economy (even without any change in current or future policy) affects consumption, and the sign of this effect depends on whether or not the zero lower bound binds, (3) a commitment by the central bank to increase future inflation can reduce current consumption, (4) the government spending multiplier can be negative, and (5) shocks to uncertainty can have first-order effects.

Full Text:  “Empirical Properties of Inflation Expectations and the Zero Lower Bound”