Barsky and Sims (2012, AER) demonstrated, via indirect inference, that confidence innovations can be viewed as noisy signals about medium-term economic growth. They highlighted that the connection between confidence and subsequent activity, such as consumption and output, is primarily driven by news shocks about the future. We expand upon their research in two significant ways. First, we incorporate the Great Recession and ZLB episodes, and second, we employ unique state-level data to offer insights into how to interpret the relationship between consumer confidence and economic activity. Our results confirm the main finding of Barsky and Sims (2012) that this relationship is predominantly driven by news about the future.

This paper investigates the aggregate and the distributional consequences of raising the inflation target from 2% to 4% using a HANK (Heterogeneous Agent New Keynesian) model. We find that, during the transition towards the 4% inflation target, the economy experiences substantial expansion because of the forward-looking Phillips curve and the Taylor rule that features a significant degree of interest rate smoothing. Also, the transition reduces the overall degree of inequality by lowering the unemployment rate and the real interest rate though it leaves bigger welfare gains for the top than for the middle. During the simulation around the new steady-state with the 4% inflation target, both frequency and duration of the ELB episodes are lower. Importantly, the average unemployment rate and its standard deviation are significantly lower with the higher inflation target, which leads to higher aggregate demand and lower overall inequality on average.