Monetary Policy with Opinionated Markets
Name
aer.20210271.pdf
Description
Published version
Size
987.9 KB
Format
Adobe PDF
Checksum (MD5)
dc76b6cf448641c7f09e6a68092560f2
Author(s)
Caballero, Ricardo J
Simsek, Alp
Date Issued
July 1, 2022
Journal
American Economic Review
Publisher
American Economic Association
Citation
Caballero, Ricardo J and Simsek, Alp. 2022. "Monetary Policy with Opinionated Markets." American Economic Review, 112 (7).
Version
Final published version
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. (JEL D83, E12, E31, E43, E44, E52, E58)
MIT Department
Massachusetts Institute of Technology. Department of Economics
Terms of Use
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.
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DOI of Published Version
https://doi.org/10.1257/aer.20210271
