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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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Suggested Citation

  • Laurence Ball & Dean Croushore, 1995. "Expectations and the effects of monetary policy," Working Papers 95-22, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:95-22
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    More about this item

    Keywords

    Monetary policy;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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