My reading of these findings is that agents react more gradually to new information and place greater weight on current outcomes than is suggested by our baseline frameworks. If this reading is correct – and I’m sure Michael will tell me, as he is here today – we should factor in prolonged periods of learning and adjustment before behaviours change.
What, then, are the monetary policy implications of the three demand-side forces that I have highlighted? First of all, elements of expectations formation that rely not on forward but backward-looking information can make it harder to return to target, if inflation becomes entrenched. This obviously means that there is no room for complacency in monetary policymaking.