Expectations and Monetary Policy: Experimental Evidence
AbstractThe effectiveness of monetary policy depends, to a large extent, on market expectations of its future actions. In a standard New Keynesian business-cycle model with rational expectations, systematic monetary policy reduces the variance of inflation and the output gap by at least two-thirds. These stabilization benefits can be substantially smaller if expectations are non-rational. We design an economic experiment that identifies the contribution of expectations to macroeconomic stabilization achieved by systematic monetary policy. We find that, despite some non-rational component in expectations formed by experiment participants, monetary policy is quite potent in providing stabilization, reducing macroeconomic variance by roughly half.
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 13-44.
Length: 70 pages
Date of creation: 2013
Date of revision:
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Business fluctuations and cycles; Monetary policy implementation; Transmission of monetary policy;
Other versions of this item:
- Oleksiy Kryvtsov & Luba Petersen, 2013. "Expectations and Monetary Policy: Experimental Evidence," Working Papers dp13-09, CRABE, Department of Economics, Simon Fraser University.
- C9 - Mathematical and Quantitative Methods - - Design of Experiments
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-12-06 (All new papers)
- NEP-CBA-2013-12-06 (Central Banking)
- NEP-MAC-2013-12-06 (Macroeconomics)
- NEP-MON-2013-12-06 (Monetary Economics)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- The experimental macroeconomics of monetary policy
by Economic Logician in Economic Logic on 2013-11-05 16:44:00
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