Managing Households' Expectations with Salient Economic Policies

74 Pages Posted: 14 Oct 2019

See all articles by Francesco D'Acunto

Francesco D'Acunto

Boston College

Daniel Hoang

Karlsruhe Institute of Technology (KIT)

Michael Weber

University of Chicago - Finance

Multiple version iconThere are 3 versions of this paper

Date Written: 2019

Abstract

The empirical effectiveness of economic policies that operate theoretically through similar channels differs substantially. We document this fact by comparing an easy-to-grasp expectations-based policy, unconventional fiscal policy, with a policy whose implications are harder to understand by non-expert consumers, forward guidance. Both policies aim to stimulate consumption via managing inflation expectations based on the Euler equation. Unconventional fiscal policy uses trivial announcements of future consumer-price increases to boost inflation expectations and consumption expenditure on impact. Instead, forward guidance requires that agents understand the inflationary effects of future low interest rates to increase their inflation expectations and spending today. We find households' inflation expectations and readiness to spend react substantially to unconventional fiscal policy announcements. The reaction is homogeneous across households with different levels of sophistication. Instead, households do not react after forward guidance announcements. These results support recent work stressing the importance of limited cognition for the effectiveness of policies.

Keywords: expectations, natural experiments, consumption, fiscal policy, monetary policy, macroeconomics with micro data

JEL Classification: D120, D840, D910, E210, E310, E320, E520, E650

Suggested Citation

D'Acunto, Francesco and Hoang, Daniel and Weber, Michael, Managing Households' Expectations with Salient Economic Policies (2019). CESifo Working Paper No. 7793, Available at SSRN: https://ssrn.com/abstract=3468022

Francesco D'Acunto (Contact Author)

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Daniel Hoang

Karlsruhe Institute of Technology (KIT) ( email )

Karlsruhe
Germany

Michael Weber

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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