Imperfect knowledge undermines monetary policy effectiveness, leading to severe recessions.
Monetary policies targeting the price level can help stabilize the economy during low inflation. When interest rates hit zero, expectations of future inflation can boost output and prices. However, if the public doesn't fully understand the policy, it can lead to severe recessions. Clear communication about future monetary actions can reduce confusion and stabilize the economy. In a low inflation environment, learning about the economy's behavior is crucial for effective policy responses to maintain stable inflation and output levels.