Monetary Policy with Opinionated Markets
<jats:p> We build a model in which the Fed and the market disagree about future aggregate demand. The market anticipates monetary policy “mistakes,” which affect current demand and induce the Fed to partially accommodate the market’s view. The Fed expects to implement its view gradually. Annou...
| Main Authors: | , |
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| Other Authors: | |
| Format: | Article |
| Language: | English |
| Published: |
American Economic Association
2022
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| Online Access: | https://hdl.handle.net/1721.1/144449 |
| _version_ | 1826212048719052800 |
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| author | Caballero, Ricardo J Simsek, Alp |
| author2 | Massachusetts Institute of Technology. Department of Economics |
| author_facet | Massachusetts Institute of Technology. Department of Economics Caballero, Ricardo J Simsek, Alp |
| author_sort | Caballero, Ricardo J |
| collection | MIT |
| description | <jats:p> We build a model in which the Fed and the market disagree about future aggregate demand. The market anticipates monetary policy “mistakes,” which affect current demand and induce the Fed to partially accommodate the market’s view. The Fed expects to implement its view gradually. Announcements that reveal an unexpected change in the Fed’s belief provide a microfoundation for monetary policy shocks. Tantrum shocks arise when the market misinterprets the Fed’s belief and overreacts to its announcement. Uncertainty about tantrums motivates further gradualism and communication. Finally, disagreements affect the market’s expected inflation and induce a policy trade-off similar to “ cost-push” shocks. (JEL D83, E12, E31, E43, E44, E52, E58) </jats:p> |
| first_indexed | 2024-09-23T15:15:39Z |
| format | Article |
| id | mit-1721.1/144449 |
| institution | Massachusetts Institute of Technology |
| language | English |
| last_indexed | 2024-09-23T15:15:39Z |
| publishDate | 2022 |
| publisher | American Economic Association |
| record_format | dspace |
| spelling | mit-1721.1/1444492023-08-07T18:14:41Z Monetary Policy with Opinionated Markets Caballero, Ricardo J Simsek, Alp Massachusetts Institute of Technology. Department of Economics <jats:p> We build a model in which the Fed and the market disagree about future aggregate demand. The market anticipates monetary policy “mistakes,” which affect current demand and induce the Fed to partially accommodate the market’s view. The Fed expects to implement its view gradually. Announcements that reveal an unexpected change in the Fed’s belief provide a microfoundation for monetary policy shocks. Tantrum shocks arise when the market misinterprets the Fed’s belief and overreacts to its announcement. Uncertainty about tantrums motivates further gradualism and communication. Finally, disagreements affect the market’s expected inflation and induce a policy trade-off similar to “ cost-push” shocks. (JEL D83, E12, E31, E43, E44, E52, E58) </jats:p> 2022-08-26T11:58:06Z 2022-08-26T11:58:06Z 2022-07-01 2022-08-26T11:47:00Z Article http://purl.org/eprint/type/JournalArticle https://hdl.handle.net/1721.1/144449 Caballero, Ricardo J and Simsek, Alp. 2022. "Monetary Policy with Opinionated Markets." American Economic Review, 112 (7). en 10.1257/aer.20210271 American Economic Review Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use. application/pdf American Economic Association American Economic Association |
| spellingShingle | Caballero, Ricardo J Simsek, Alp Monetary Policy with Opinionated Markets |
| title | Monetary Policy with Opinionated Markets |
| title_full | Monetary Policy with Opinionated Markets |
| title_fullStr | Monetary Policy with Opinionated Markets |
| title_full_unstemmed | Monetary Policy with Opinionated Markets |
| title_short | Monetary Policy with Opinionated Markets |
| title_sort | monetary policy with opinionated markets |
| url | https://hdl.handle.net/1721.1/144449 |
| work_keys_str_mv | AT caballeroricardoj monetarypolicywithopinionatedmarkets AT simsekalp monetarypolicywithopinionatedmarkets |