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Expectations and the Effects of Monetary Policy

  • Ball, Laurence
  • Croushore, Dean

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. We 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. We 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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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 35 (2003)
Issue (Month): 4 (August)
Pages: 473-84

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Handle: RePEc:mcb:jmoncb:v:35:y:2003:i:4:p:473-84
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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