The Effects of Monetary Policy: Theory with Measured Expectations

Christopher Roth, Mirko Wiederholt () and Johannes Wohlfart ()
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Mirko Wiederholt: LMU - Ludwig-Maximilians University [Munich], ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research
Johannes Wohlfart: CEBI - Center for Economic Behavior and Inequality - UCPH - University of Copenhagen = Københavns Universitet, UCPH - University of Copenhagen = Københavns Universitet

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Abstract: We study the effects of monetary policy on aggregate consumption with a general equilibrium model but without making assumptions about expectation formation. The key idea is to express consumption of non-hand-to-mouth households as a function of expectations only and to elicit all expectations appearing in the consumption functions for alternative policy scenarios with a tailored survey. We illustrate this approach by computing aggregate consumption for alternative policies before the March 2021 and March 2022 FOMC meetings. We find that a modest forward guidance statement in the March 2021 FOMC meeting would have reduced aggregate consumption by 0.17% on impact and an interest rate hike of 50 basis points in the March 2022 FOMC meeting would have reduced aggregate consumption by 0.15% on impact.

Keywords: Monetary Policy; Expectation Formation; Aggregate Consumption (search for similar items in EconPapers)
Date: 2022-07-21
New Economics Papers: this item is included in nep-mon
Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03878711v1
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Working Paper: The Effects of Monetary Policy: Theory with Measured Expectations (2023)
Working Paper: The Effects of Monetary Policy: Theory with Measured Expectations (2023)
Working Paper: The Effects of Monetary Policy: Theory with Measured Expectations (2022)
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