Disagreement and Monetary Policy

67 Pages Posted: 5 Nov 2017

See all articles by Elisabeth Falck

Elisabeth Falck

Goethe University Frankfurt

Mathias Hoffmann

Deutsche Bundesbank

Patrick Hürtgen

Deutsche Bundesbank

Multiple version iconThere are 2 versions of this paper

Date Written: 2017

Abstract

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: C52, D83, E31, E32, E52

Suggested Citation

Falck, Elisabeth and Hoffmann, Mathias and Hürtgen, Patrick, Disagreement and Monetary Policy (2017). Bundesbank Discussion Paper No. 29/2017. Available at SSRN: https://ssrn.com/abstract=3065179

Elisabeth Falck (Contact Author)

Goethe University Frankfurt

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Mathias Hoffmann

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Patrick Hürtgen

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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