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 and inflation drops, people expect future policies to boost inflation back up. However, if people don't fully understand these policies, it can make things worse. With better communication, the impact of low inflation and the zero lower bound can be reduced. Learning about the economy and adjusting policy responses accordingly can help stabilize both inflation and output, even with low inflation targets.