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Dispersed Inflation Expectations and the Zero Lower Bound

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  • Mirko Wiederholt

    (Northwestern University)

Abstract

Micro data on inflation expectations has two important properties: (i) there is substantial heterogeneity in inflation expectations across households, and (ii) the average inflation expectation responds slowly to shocks to actual inflation. This paper studies the effect of dispersed inflation expectations on dynamics at the zero lower bound. Following Eggertsson and Woodford (2003) and Christiano, Eichenbaum and Rebelo (2010), I study the effect of a temporary change in households' discount factor. The difference to these papers is that different households are hit by different discount factor shocks. Furthermore, households only observe their own discount factor shock and not the cross-sectional distribution of discount factor shocks in the population. Households infer from their own discount factor shock the distribution of discount factor shocks in the population. This creates dispersion in beliefs about the state of the economy. I study how this dispersion in beliefs affects dynamics at the zero lower bound.

Suggested Citation

  • Mirko Wiederholt, 2012. "Dispersed Inflation Expectations and the Zero Lower Bound," 2012 Meeting Papers 1071, Society for Economic Dynamics.
    • Handle: RePEc:red:sed012:1071
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    Cited by:

    1. Domenico Lombardi & Pierre L. Siklos & Samantha St. Amand, 2019. "Government Bond Yields At The Effective Lower Bound: International Evidence," Contemporary Economic Policy, Western Economic Association International, vol. 37(1), pages 102-120, January.

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