This overlaps with the signaling effect associated with the “quantity” that I just mentioned.6 One possible problem is that the theoretical foundations seem not to be well established. Standard theories simply assume that rational expectations automatically hold, while they tend to be silent on exactly what it would take to change the way firms and households formulate their expectations.
Inflation could decline somewhat from present levels and still remain positive, although it is true that the lower the inflation rate goes, the greater is the risk of actual deflation at some future time. This distinction between inflation that is positive yet too low and deflation is worth exploring for a moment.