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@techreport{NBERw22009,
title = "Sluggish Inflation Expectations: A Markov Chain Analysis",
author = "Kocherlakota, Narayana R",
institution = "National Bureau of Economic Research",
type = "Working Paper",
series = "Working Paper Series",
number = "22009",
year = "2016",
month = "February",
doi = {10.3386/w22009},
URL = "http://www.nber.org/papers/w22009",
abstract = {A large body of recent empirical work on inflation dynamics documents that current real variables (like unemployment or output gaps) have little explanatory power for future inflation. Motivated by these findings, I explore the properties of a wide class of models in which inflation expectations respond little, if at all, to real economic conditions. In this general context, I examine Markov equilibria to games in which the relevant forcing processes are Markov chains and the central bank chooses a short- term nominal interest rate at each date subject to a lower bound. I construct a simple numerical algorithm to solve for such Markov equilibria. I apply the algorithm to a numerical example. In the example, the economy can experience long periods of what looks like secular stagnation because households believe that there is a significant risk of a crisis (that is, a sharp decline in economic activity). Within the example, there are large benefits to being able to reduce the lower bound on the short-term nominal interest rate by as little as fifty basis points.},
}