policymakers demonstrate

442 Charles Brendon and Giancarlo Corsetti
transmission of fiscal policy. As discussed above, the New Keynesian mechanism
adopted by Eggertsson (2011) and Christiano et al. (2011) posits that
higher spending is associated with higher future inflation, which reduces the
ex ante real interest rate and raises current output more than one-for-one with
the increase in G t . Bahaj and Rendahl instead find evidence that unanticipated
increases in government spending are associated with decreases in inflation.
This means that the inflation expectations channel works against stabilization:
the real interest rate is higher when future government spending is expected
to be higher. Consequently, Bahaj and Rendahl show that the fiscal multipliers
would be higher without the inflation expectations channel. Unlike Wieland
(2014), these results do rely on data from periods when the zero bound was
not binding, and for this reason they cannot be viewed as a direct contradiction
to the New Keynesian mechanism. It is possible that expectations react
differently during a liquidity trap, due to the role of monetary policy counteracting
any fiscal stimulus. Nonetheless, strong evidence in favour of the New
Keynesian mechanism remains notably absent.
Given the central role of inflation expectations in the policy conclusions surveyed
above, this is an area where further contributions are urgently needed. If
it is the case that changes in inflation expectations do not deliver large inducements
to spend, or if the empirical relationship between real economic developments
and inflation expectations departs from the New Keynesian model,
conclusions ranging from the size of the fiscal multipliers to the role of forward
guidance will need to be rethought. This would not rule out the possibility
of, for instance, fiscal multipliers being higher at the zero bound than during
normal times, but it may have very important implications for the appropriate
ranking of policies. When the inflation expectations channel is weak, forward
guidance in particular does not appear such a useful option.
10.5 Policies and Diagnoses of the Crisis
In keeping with the bulk of the literature, our analysis so far has assumed that
the main reason for nominal interest rates reaching their zero bound is an exogenous
increase in the willingness of consumers to save. This is often interpreted
as a reduction in the ‘natural’ real rate of interest that equates aggregate savings
and aggregate investment in the economy, but it is unclear what economic
phenomenon could be driving such a drop. A more recent literature has sought
to account for this development in a more detailed manner.
10.5.1 What Causes ‘Savings Shocks’?
Work by Guerrieri and Lorenzoni (2015) has formalized the idea that large increases
in aggregate net savings rates could be driven by a need for households