Managing Households' Expectations with Unconventional Policies

Abstract

Binding lower bounds on interest rates and large government deficits make fiscal and monetary policies that stimulate households' spending through financial intermediaries and firms unviable. Policymakers have thus been implementing unconventional policies that aim to manage households' expectations and spending directly. We first show theoretically and empirically that higher inflation expectations increase households' consumption. We then design a difference-in-differences strategy to assess the effectiveness of unconventional fiscal policy and forward guidance, both of which aim to raise aggregate demand via managing households' expectations. Whereas unconventional fiscal policy effectively increases households' expectations and spending, forward guidance announcements do not.

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