Disagreement and Monetary Policy
Bundesbank Discussion Paper No. 29/2017, ISBN: 978-3-95729-398-5
67 Pages Posted: 9 Oct 2017
Date Written: September 29, 2017
Time-variation in disagreement about inflation expectations is a stylized fact in surveys, but little is known on how disagreement interacts with the efficacy of monetary policy. This paper fills this gap in providing theoretical predictions of monetary policy shocks for different levels of disagreement and testing these empirically. When disagreement is high, a dispersed information New Keynesian model predicts that a contractionary monetary policy shock leads to a short-run rise in inflation and inflation expectations, whereas both decline when disagreement is low. Estimating a smooth-transition model on U.S. data shows significantly-different responses in inflation and inflation expectations consistent with theory.
Keywords: disagreement, dispersed information, disanchoring of inflation expectations, monetary policy transmission, state-dependent effects of monetary policy, local projections
JEL Classification: D83, E31, E32, E52
Suggested Citation: Suggested Citation