Zero Lower Bound on Inflation Expectations

There have been suggestions for monetary policy to engineer higher inflation expectations to stimulate spending. We examine the relationship between expected inflation and spending attitudes using the microdata from the Michigan Survey of Consumers. The impact of higher inflation expectations on the reported readiness to spend on durables is generally small, outside the zero lower bound, often statistically insignificant, and inside of it typically significantly negative. In our baseline specification, a one percentage point increase in expected inflation during the recent zero lower bound period reduces households' probability of having a positive attitude towards spending by about 0.5 percentage points. (JEL D12, D84, E21, E31, E52)

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Does an Increase in Inflation Expectations Stimulate Consumption at the Zero Lower Bound?

Politická ekonomie ◽

10.18267/j.polek.1221 ◽

2018 ◽

Vol 66 (6) ◽

pp. 751-775

Author(s):

Pavel Potužák

Keyword(s):

Lower Bound ◽

Inflation Expectations ◽

Zero Lower Bound

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Zero Lower Bound on Inflation Expectations

SSRN Electronic Journal ◽

10.2139/ssrn.3968719 ◽

2021 ◽

Author(s):

Yuriy Gorodnichenko ◽

Dmitriy Sergeyev

Keyword(s):

Lower Bound ◽

Inflation Expectations ◽

Zero Lower Bound

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Effects of Fed policy rate forecasts on real yields and inflation expectations at the zero lower bound

Economics Letters ◽

10.1016/j.econlet.2020.109654 ◽

2021 ◽

Vol 198 ◽

pp. 109654

Author(s):

Gabriele Galati ◽

Richhild Moessner

Keyword(s):

Lower Bound ◽

Inflation Expectations ◽

Zero Lower Bound

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The Macroeconomics of Trend Inflation

Journal of Economic Literature ◽

10.1257/jel.52.3.679 ◽

2014 ◽

Vol 52 (3) ◽

pp. 679-739 ◽

Cited By ~ 85

Author(s):

Guido Ascari ◽

Argia M. Sbordone

Keyword(s):

Monetary Policy ◽

Lower Bound ◽

New Keynesian ◽

Inflation Expectations ◽

Positive Trend ◽

Zero Lower Bound ◽

Keynesian Model ◽

Long Run ◽

Trend Inflation ◽

Inflation Targets

Most macroeconomic models for monetary policy analysis are approximated around a zero inflation steady state, but most central banks target an inflation rate of about 2 percent. Many economists have recently proposed even higher inflation targets to reduce the incidence of the zero lower bound constraint on monetary policy. In this survey, we show that the conduct of monetary policy should be analyzed by appropriately accounting for the positive trend inflation targeted by policymakers. We first review empirical research on the evolution and dynamics of U.S. trend inflation and some proposed new measures to assess the volatility and persistence of trend-based inflation gaps. We then construct a Generalized New Keynesian model that accounts for a positive trend inflation. In this model, an increase in trend inflation is associated with a more volatile and unstable economy and tends to destabilize inflation expectations. This analysis offers a note of caution regarding recent proposals to address the existing zero lower bound problem by raising the long-run inflation target. (JEL E12, E31, E32, E52, E58)

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