Monetary Policy with Opinionated Markets

Ricardo Caballero () and Alp Simsek

American Economic Review, 2022, vol. 112, issue 7, 2353-92

Abstract: We build a model in which the Fed and the market disagree about future aggregate demand. The market anticipates monetary policy "mistakes," which affect current demand and induce the Fed to partially accommodate the market's view. The Fed expects to implement its view gradually. Announcements that reveal an unexpected change in the Fed's belief provide a microfoundation for monetary policy shocks. Tantrum shocks arise when the market misinterprets the Fed's belief and overreacts to its announcement. Uncertainty about tantrums motivates further gradualism and communication. Finally, disagreements affect the market's expected inflation and induce a policy trade-off similar to "cost-push" shocks.

JEL-codes: D83 E12 E31 E43 E44 E52 E58 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (9)

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Working Paper: Monetary Policy with Opinionated Markets (2022)
Working Paper: Monetary Policy with Opinionated Markets (2020)
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DOI: 10.1257/aer.20210271

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