Giuseppe Pagano Giorgianni

This paper studies the macroeconomic effects of a belief distortion shock—defined as the unexpected component of household inflation expectations after accounting for professional forecasts and observable fundamentals. Using survey data, U.S. macroeconomic variables, and machine-learning methods, we identify this shock and examine its effects both within and outside the zero lower bound (ZLB), conditioning on household inflation uncertainty. The shock raises inflation, uncertainty, and unemployment in normal times. At the ZLB, the shock reduces real interest rates and becomes expansionary; however, the accompanying rise in inflation uncertainty dampens or can even reverse these effects. A New Keynesian model with belief shocks replicates these dynamics and matches the empirical patterns of inflation uncertainty.