Price-level targeting (PLT) is optimal under the fully-informed rational expectations (FIRE) benchmark but lacks … experiment - where expectations are elicited from human subjects - to collect data on expectations, inflation and output dynamics … emulate the subjects' expectations with a micro-founded heterogeneous-expectation New Keynesian (HENK) model and reproduce the …

We study zero interest-rate policy in response to a large negative demand shock when long-run expectations can fall … over time. Because falling expectations make monetary policy less effective by raising real interest rates, the optimal … forward guidance policy makes large front-loaded promises to stabilize expectations. Policy is too stimulatory in the event of …