We address the question in this paper's title using an estimated New Keynesian DSGE model of the euro area with trend inflation, imperfect indexation, and a lower bound on the nominal interest rate. In this setup, a decrease in the steady-state real interest rate, r*, increases the probability...

We study how firms' expectations and actions are affected by both aggregate and industryspecific conditions using a survey of French manufacturing firms. We document an important new stylized fact. In response to industry-level shocks that have no aggregate effects, firms' aggregate expectations...

We provide evidence that households discretize their inflation expectations so that what matters for durable consumption decisions is the broad inflation regime they expect. Using survey data, we document that a large share of the adjustment in the average inflation expectation comes from the...

We document empirical regularities of disaggregated inflation and consumption and study whether multisectoral New Keynesian models can explain them. We focus on higher moments of the inflation and consumption growth distributions as well as on the contemporaneous comovement of these two...

We study the aggregate effects of sectoral productivity shocks in a multisectoral New Keynesian open-economy model that allows for asymmetric input-output linkages, both within and between countries, as well as for heterogeneity in sectoral Calvo-type price stickiness. Asymmetries in the...

We provide survey evidence on how households’ inflation expectations matter for their spending highlighting a behavioral distortion compared to the New Keynesian setup. A large share of households expects prices to remain stable instead of increasing. Such a belief is linked to individual...