Managing Households' Expectations with Unconventional Policies
74 Pages Posted: 10 Aug 2019 Last revised: 5 Jun 2020
Date Written: June 2020
With a binding effective lower bound on interest rates and large government deficits, conventional policies are unviable and policymakers resort to unconventional policies, which target households' expectations directly. Using unique micro data and a difference-in-differences strategy, we assess the effectiveness of unconventional fiscal policy and forward guidance, both of which aim to stimulate consumption via raising households' inflation expectations. All households' inflation expectations and spending plans react to unconventional fiscal policy. Instead, households, contrary to experts, do not react to forward guidance. We argue that policies aiming to a_ect households directly are ineffective if (non-expert) households do not understand them.
Keywords: Expectations, Household Finance, Heterogeneous Beliefs, Fiscal Policy, Monetary Policy, Cognitive Abilities, Behavioral Macroeconomics, Macroeconomics with Micro Data
JEL Classification: D12, D84, D91, E21, E31, E32, E52, E65
Suggested Citation: Suggested Citation