strongly than in the rational model after an inflationary supply shock to fully stabilize inflation. While fully stabilizing … inflation keeps output at potential, higher real interest rates mainly benefit wealthy households and increase the cost of …

positive at the onset of the episode, through promising higher inflation rates in future periods. We embed our theory into a … commiting to keep interest rates low at the exit of the liquidity trap, to stabilize inflation today. 2. From debt … consolidated budget) monetary policy becomes subservient to fiscal policy, giving rise to more volatile inflation, output and …