Monetary Policy with Opinionated Markets
Author(s)
Caballero, Ricardo J; Simsek, Alp
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<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>
Date issued
2022-07-01Department
Massachusetts Institute of Technology. Department of EconomicsJournal
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