Monetary Policy with Opinionated Markets

<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 g...

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Bibliographic Details
Main Authors: Caballero, Ricardo J (Author), Simsek, Alp (Author)
Format: Article
Language:English
Published: American Economic Association, 2022-08-26T11:58:06Z.
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Online Access:Get fulltext
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100 1 0 |a Caballero, Ricardo J  |e author 
700 1 0 |a Simsek, Alp  |e author 
245 0 0 |a Monetary Policy with Opinionated Markets 
260 |b American Economic Association,   |c 2022-08-26T11:58:06Z. 
856 |z Get fulltext  |u https://hdl.handle.net/1721.1/144449 
520 |a <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> 
546 |a en 
655 7 |a Article 
773 |t 10.1257/aer.20210271 
773 |t American Economic Review