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...

With interest rates at zero where they are expected to remain for a long time, and with the main risk being that inflation is too low, fiscal policy must be active and contribute to cyclical stabilisation