Household Inflation Expectations Impact Economy More Than Previously Thought
Households have different ideas about future inflation, and these ideas don't change quickly when actual inflation changes. In models where interest rates can't go below zero, everyone thinks the same about inflation and their ideas change quickly. This study made a model where households have different information and slow-changing ideas about inflation. The model shows that in bad times, prices don't fall as much as they would if everyone had perfect information. When the central bank talks about future plans, it can make people spend more or less depending on whether interest rates are at zero. Promising higher future inflation can actually make people spend less. Also, government spending might not always boost the economy, and uncertainty can have big effects.