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Working Paper
Living Up to Expectations: The Effectiveness of Forward Guidance and Inflation Dynamics Post-Global Financial Crisis
This paper studies the effectiveness of forward guidance when central banks face private agents with heterogeneous expectations allowing for a degree of bounded rationality. Exploiting unique survey-based measures of expected inflation, output growth and interest rates, we estimate a small-scale New Keynesian model with forward guidance shocks for the United States and the other G7 countries plus Spain. We find that the share of fully-informed rational expectations (FIRE) agents in aggregate expectations is similar for the U.S., the U.K., Germany and other major advanced economies (albeit far ...
Working Paper
The Effects of Interest Rate Increases on Consumers' Inflation Expectations: The Roles of Informedness and Compliance
We study how monetary policy communications associated with increasing the federal funds rate causally affect consumers' inflation expectations. In a large-scale, multi-wave randomized controlled trial (RCT), we find weak evidence on average that communicating policy changes lowers consumers' medium-term inflation expectations. However, information differs systematically across demographic groups, in terms of ex ante informedness about monetary policy and ex post compliance with the information treatment. Monetary policy communications have a much stronger effect on people who had not ...
Working Paper
The Effects of Interest Rate Increases on Consumers' Inflation Expectations: The Roles of Informedness and Compliance
We study how monetary policy communications associated with increasing the federal funds rate causally affect consumers' inflation expectations in real time. In a large-scale, multi-wave randomized controlled trial (RCT), we find weak evidence that communicating these policy changes lowers consumers' medium-term inflation expectations on average. However, information differs systematically across demographic groups, in terms of ex ante informedness about monetary policy and ex post compliance with the information treatment. Monetary policy communications have a much stronger effect on the ...
Working Paper
Understanding Uncertainty Shocks and the Role of Black Swans
Economic uncertainty is a powerful force in the modern economy. Research shows that surges in uncertainty can trigger business cycles, bank runs and asset price fluctuations. But where do sudden surges in uncertainty come from? This paper provides a data-disciplined theory of belief formation that explains large fluctuations in uncertainty. It argues that people do not know the true distribution of macroeconomic outcomes. Like Bayesian econometricians, they estimate a distribution. Our main contribution is to explain why real-time estimation of distributions with non-normal tails results in ...
Report
Is There Hope for the Expectations Hypothesis?
Most macroeconomic models impose a tight link between expected future short rates and the term structure of interest rates via the expectations hypothesis (EH). While systematically rejected in the data, existing work evaluating the EH generally assumes either full-information rational expectations or stationarity of beliefs, or both. As such, these analyses are ill-equipped to refute the EH when these assumptions fail to hold, leaving the door open for a “resurrection” of the EH. We introduce a model of expectations formation which features time-varying means and accommodates deviations ...
Report
How Do We Learn About the Long Run?
Using a novel and unique panel dataset of individual-level professional forecasts at short, medium, and very-long horizons, we provide new stylized facts about survey forecasts. We present direct evidence that forecasters use multivariate models in an environment with imperfect information about the current state, leading to heterogenous non-stationary expectations about the long run. We show forecast revisions are consistent with the predictions of a multivariate unobserved trend and cycle model. Our results suggest models of expectations formation which are either univariate, stationary, or ...