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Real and nominal effects of monetary shocks under time-varying disagreement

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  • Esady, Vania

    (Bank of England)

Abstract

How do varying degrees of information frictions affect the transmission mechanism of monetary policy? Using non‑linear methods, I empirically find that during heightened disagreement, monetary policy has a smaller effect on inflation, yet more influence over output. As a proxy for information frictions, I use real GDP nowcast disagreement across professional forecasters. Significant nowcast disagreement indicates when it is difficult to observe the current economic state, or a period of high information rigidities. I develop a tractable theoretical model that shows rationally inattentive price‑setters produce this result. Improved central bank communication that reduces disagreement among economic agents can mitigate output losses when implementing disinflationary monetary policies.

Suggested Citation

  • Esady, Vania, 2022. "Real and nominal effects of monetary shocks under time-varying disagreement," Bank of England working papers 1007, Bank of England.
    • Handle: RePEc:boe:boeewp:1007
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    More about this item

    Keywords

    Time-varying disagreement; monetary policy; state-dependent local projections; rational inattention;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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