Inflation Disagreement Weakens the Power of Monetary Policy

Ding Dong (ding.dong@connect.ust.hk), Zheng Liu, Pengfei Wang and Min Wei
Additional contact information
Ding Dong: http://phd.bm.ust.hk/programs/student-profiles/1584

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

Abstract: Households often disagree in their inflation outlooks. We present novel empirical evidence that inflation disagreement weakens the power of forward guidance and conventional monetary policy. These empirical observations can be rationalized by a model featuring heterogeneous beliefs about the central banks’ inflation target. An agent who perceives higher future inflation also perceives a lower real interest rate and thus would like to borrow more to finance consumption, subject to borrowing constraints. Higher inflation disagreement would lead to a larger share of borrowing-constrained agents, resulting in more sluggish responses of aggregate consumption to changes in both current and expected future interest rates. This mechanism also provides a microeconomic foundation for Euler equation discounting that helps 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: 66
Date: 2024-08-05
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mon
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
reference.library@sf.frb.org

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 (reference.library@sf.frb.org).