Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/204451
Authors: 
Bersson, Betsy
Hürtgen, Patrick
Paustian, Matthias
Year of Publication: 
2019
Series/Report no.: 
Bundesbank Discussion Paper 34/2019
Abstract: 
At the zero lower bound (ZLB), expectations about the future path of monetary or fiscal policy are crucial. We model expectations formation under level-k thinking, a form of bounded rationality introduced by García-Schmidt and Woodford (2019) and Farhi and Werning (2017), consistent with experimental evidence. This process does not lead to a number of puzzling features from rational expectations models, such as the forward guidance and the reversal puzzle, or implausible large fiscal multipliers. Optimal monetary policy at the ZLB under level-k thinking prescribes keeping the nominal rate lower for longer, but short-run macroeconomic stabilization is less powerful compared to rational expectations.
Subjects: 
expectations formation
optimal monetary policy
New Keynesian model
zero lower bound
forward guidance puzzle
reversal puzzle
fiscal multiplier
JEL: 
E32
ISBN: 
978-3-95729-626-9
Document Type: 
Working Paper

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