Monetary Policy with Opinionated Markets

Ricardo Caballero () and Alp Simsek

No 27313, NBER Working Papers from National Bureau of Economic Research, Inc

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: E00 E12 E21 E32 E43 E44 G11 G12 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: AP EFG ME
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Citations: View citations in EconPapers (1)

Published as Ricardo J. Caballero & Alp Simsek, 2022. "Monetary Policy with Opinionated Markets," American Economic Review, vol 112(7), pages 2353-2392.

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