source of inflationary shocks. To the extent that inflation is driven by demand shocks, firms with market power are likely to … respond by increasing margins, and thereby amplifying the inflationary impact of higher demand. By contrast, imperfectly …

appreciates in response to an asymmetric negative demand shock at the zero lower bound (ZLB) and exacerbates the adverse … expectations consistent with survey expectations using imperfect information, we find that exchange rates can absorb demand shocks … at the ZLB. In sharp contrast to the full information model: (i) A negative demand shock concentrated in the home country …