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The Effects of Monetary Policy: Theory with Measured Expectations

Author

Listed:
  • Christopher Roth

    (University of Cologne)

  • Mirko Wiederholt

    (LMU - Ludwig-Maximilians University [Munich], ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research)

  • Johannes Wohlfart

    (CEBI - Center for Economic Behavior and Inequality - UCPH - University of Copenhagen = Københavns Universitet, UCPH - University of Copenhagen = Københavns Universitet)

Abstract

We study the effects of monetary policy on aggregate consumption with a general equilibrium model but without making assumptions about expectation formation. The key idea is to express consumption of non-hand-to-mouth households as a function of expectations only and to elicit all expectations appearing in the consumption functions for alternative policy scenarios with a tailored survey. We illustrate this approach by computing aggregate consumption for alternative policies before the March 2021 and March 2022 FOMC meetings. We find that a modest forward guidance statement in the March 2021 FOMC meeting would have reduced aggregate consumption by 0.17% on impact and an interest rate hike of 50 basis points in the March 2022 FOMC meeting would have reduced aggregate consumption by 0.15% on impact.

Suggested Citation

  • Christopher Roth & Mirko Wiederholt & Johannes Wohlfart, 2022. "The Effects of Monetary Policy: Theory with Measured Expectations," Working Papers hal-03878711, HAL.
    • Handle: RePEc:hal:wpaper:hal-03878711
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03878711
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    Cited by:

    1. Aidala, Felix & Armantier, Olivier & Koşar, Gizem & Somerville, Jason & Topa, Giorgio & van der Klaauw, Wilbert, 2024. "Gasoline price changes and consumer inflation expectations: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 220(C), pages 66-80.
    2. Stephane Bonhomme & Angela Denis, 2023. "Estimating Individual Responses when Tomorrow Matters," Papers 2310.09105, arXiv.org, revised May 2024.
    3. Oliver Pfauti, 2023. "The Inflation Attention Threshold and Inflation Surges," Papers 2308.09480, arXiv.org, revised Aug 2024.
    4. Hassan Afrouzi & Joel P. Flynn & Choongryul Yang, 2024. "What Can Measured Beliefs Tell Us About Monetary Non-Neutrality?," Finance and Economics Discussion Series 2024-053, Board of Governors of the Federal Reserve System (U.S.).
    5. Isabel Gödl-Hanisch & Manuel Menkhoff, 2023. "Firms’ Pass-Through Dynamics: A Survey Approach," CESifo Working Paper Series 10520, CESifo.

    More about this item

    Keywords

    Monetary Policy; Expectation Formation; Aggregate Consumption;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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