Work

Monetary Policy with Opinionated Markets

Year: 2020

Type: article

Abstract: 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.

Source: American Economic Review

DOI: 10.1257/aer.20210271

Authors: Ricardo J. Caballero, Alp Simsek

Institutions: National Bureau of Economic Research, Massachusetts Institute of Technology, Center for Economic and Policy Research, Yale University

Language: English

Topic: Monetary Policy and Economic Impact

Subfield: General Economics, Econometrics and Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

Funders: National Science Foundation, Yale University, Yale School of Management

Awards: CAREER: Economic Crises and Amplification Mechanisms, Risk Markets Imbalances and Macroeconomics