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The Effects of Monetary Policy: Theory with Measured Expectations

Abstract

We study the effects of monetary policy on aggregate consumption with a general equilibrium model but without making assumptions about expectation formation. The key idea is to express consumption of non-hand-to-mouth households as a function of expectations only and to elicit all expectations appearing in the consumption functions for alternative policy scenarios with a tailored survey. We illustrate this approach by computing aggregate consumption for alternative policies before the March 2021 and March 2022 FOMC meetings. We find that a modest forward guidance statement in the March 2021 FOMC meeting would have reduced aggregate consumption by 0.17% on impact and an interest rate hike of 50 basis points in the March 2022 FOMC meeting would have reduced aggregate consumption by 0.15% on impact.
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Dates and versions

hal-03878711 , version 1 (30-11-2022)

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Attribution - NonCommercial - NoDerivatives

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  • HAL Id : hal-03878711 , version 1

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Christopher Roth, Mirko Wiederholt, Johannes Wohlfart. The Effects of Monetary Policy: Theory with Measured Expectations. 2022. ⟨hal-03878711⟩
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