Expectations and the Effects of Monetary Policy
FRB of Philadelphia Working Paper No. 01-12
31 Pages Posted: 10 Sep 2001
There are 3 versions of this paper
Expectations and the Effects of Monetary Policy
Expectations and the Effects of Monetary Policy
Date Written: August 2001
Abstract
This paper examines the predictive power of shifts in monetary policy, as measured by changes in the real federal funds rate, for output, inflation, and survey expectations of these variables. The authors find that policy shifts have larger effects on actual output than on expected output; thus policy predicts errors in output expectations, a violation of rational expectations. Policy shifts do not predict errors in inflation expectations. The authors explain these results with a model in which agents systematically underestimate the effects of policy on aggregate demand. This model helps to explain the real effects of policy.
JEL Classification: E52, E37
Suggested Citation: Suggested Citation
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