Measuring the U.S. monetary noise shocks

Yi‐Hua Wu and Ching‐Chong Lai

Economic Inquiry, 2025, vol. 63, issue 1, 98-124

Abstract: Agents' beliefs regarding future monetary policy changes influence their current decisions. However, these expectations may not always materialize in the future. This study shows that the monetary fundamental shocks (exogenous changes consistent with expectations) stabilize output and inflation, while the noise shocks (biased beliefs that fail to be realized in the future) increase economic fluctuations. Moreover, factors that amplify financial frictions—the spread between the capital return of entrepreneurs and the risk‐free interest rate of a central bank—can increase anticipation effects associated with these two types of monetary policy shocks.

Date: 2025
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https://doi.org/10.1111/ecin.13262

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Persistent link: https://EconPapers.repec.org/RePEc:bla:ecinqu:v:63:y:2025:i:1:p:98-124

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