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Expectations and the effects of monetary policy

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  • Laurence Ball
  • Dean Croushore

Abstract

This paper examines the predictive power of shifts in monetary policy, as measured by changes in the real federal funds rate, for output, inflation, and survey expectations of these variables. The authors find that policy shifts have larger effects on actual output than on expected output; thus policy predicts errors in output expectations, a violation of rational expectations. Policy shifts do not predict errors in inflation expectations. The authors explain these results with a model in which agents systematically underestimate the effects of policy on aggregate demand. This model helps to explain the real effects of policy.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 01-12.

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Date of creation: 2001
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Handle: RePEc:fip:fedpwp:01-12

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Keywords: Monetary policy;

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