Inflation Disagreement Weakens the Power of Monetary Policy

Ding Dong (), Zheng Liu, Pengfei Wang and Min Wei

No 2024-27, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: Household inflation disagreement weakens the impact of forward guidance and monetary policy shocks, especially when inflation forecasts are positively skewed. This attenuation effect is not driven by endogenous responses of inflation disagreement to contemporaneous shocks. A model with heterogeneous beliefs about the central bank’s inflation target explains these observations. Agents expecting higher future inflation perceive lower real interest rates and borrow more, constrained by borrowing limits. Increased inflation disagreement results in more borrowing-constrained agents, leading to slower aggregate consumption responses to interest rate changes. This mechanism also provides a microeconomic foundation for Euler equation discounting, helping to resolve the forward guidance puzzle.

Keywords: inflation uncertainty and disagreement; inflation expectations; heterogeneous beliefs; borrowing constraints; monetary policy; forward guidance (search for similar items in EconPapers)
JEL-codes: E21 E31 E52 E71 (search for similar items in EconPapers)
Pages: 80
Date: 2025-05-31
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mon
Note: Original publication date: 2024-08-08
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.frbsf.org/wp-content/uploads/wp2024-27.pdf Full text - article PDF (application/pdf)

Related works:
Working Paper: Inflation Disagreement Weakens the Power of Monetary Policy (2024)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfwp:98689

Ordering information: This working paper can be ordered from

DOI: 10.24148/wp2024-27

Access Statistics for this paper

More papers in Working Paper Series from Federal Reserve Bank of San Francisco Contact information at EDIRC.
Bibliographic data for series maintained by Federal Reserve Bank of San Francisco Research Library ().