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Asymmetries in the effects of unemployment expectation shocks as monetary policy shifts with economic conditions

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  • Ahmed, M. Iqbal
  • Cassou, Steven P.

Abstract

This paper empirically investigates the effects of expectation shocks on macroeconomic activities as monetary policy shifts with economic conditions. Prior work has focused on linear relationships between expectation shocks and economic conditions. Here, switching econometric models are used to investigate shifting policy linked to economic conditions. Motivated by the Federal Reserve Bank's attention to inflation rates and unemployment rates, several policy linkage structures are investigated; one linked to the inflation rate, two linked to unemployment rates and one using both the inflation rate and unemployment rate. Identifying an expectation shock by using the timing of information in the survey forecasts and the actual data releases, it is shown that the effects of expectation shocks on current and future macroeconomic activities are stronger under economic conditions in which the Federal Reserve Bank would be more hawkish about inflation.

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  • Ahmed, M. Iqbal & Cassou, Steven P., 2021. "Asymmetries in the effects of unemployment expectation shocks as monetary policy shifts with economic conditions," Economic Modelling, Elsevier, vol. 100(C).
    • Handle: RePEc:eee:ecmode:v:100:y:2021:i:c:s0264999321000912
    DOI: 10.1016/j.econmod.2021.105502
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    More about this item

    Keywords

    Unemployment expectation shock; Asymmetric responses; Opportunistic monetary policy; Local projection;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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