What Can Measured Beliefs Tell Us About Monetary Non-Neutrality?

RePEc Short ID: pya552
ORCID iD: 0000-0002-2837-3146

Afrouzi, Hassan; Flynn, Joel P.; Yang, Choongryul

doi:10.17016/FEDS.2024.053

Working Paper

What Can Measured Beliefs Tell Us About Monetary Non-Neutrality?

Abstract: This paper studies how measured beliefs can be used to identify monetary non-neutrality. In a general equilibrium model with both nominal rigidities and endogenous information acquisition, we analytically characterize firms’ optimal dynamic information policies and how their beliefs affect monetary non-neutrality. We then show that data on the cross-sectional distributions of uncertainty and pricing durations are both necessary and sufficient to identify monetary non-neutrality. Finally, implementing our approach in New Zealand survey data, we find that informational frictions approximately double monetary non-neutrality and endogeneity of information is important: models with exogenous information would overstate monetary non-neutrality by approximately 50%.

Keywords: Measured beliefs; Nominal rigidities; Rational inattention; Monetary non-neutrality;

JEL Classification: E31; E32; E71;

https://doi.org/10.17016/FEDS.2024.053