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Managing Households’ Expectations with Unconventional Policies

Author

Listed:
  • Francesco D’Acunto
  • Daniel Hoang
  • Michael Weber

Abstract

Binding lower bounds on interest rates and large government deficits limit the scope of fiscal and monetary policies to stimulate households’ spending through financial intermediaries and firms. Policy makers have thus been implementing unconventional policies that aim to increase households’ spending directly through managing their expectations. We first show theoretically and empirically that higher inflation expectations increase households’ consumption. We then design a difference-in-differences strategy to assess the effectiveness of unconventional fiscal policy and forward guidance, both of which aim to raise aggregate demand via managing expectations. Whereas unconventional fiscal policy increases households’ expectations and spending, forward guidance announcements do not

Suggested Citation

  • Francesco D’Acunto & Daniel Hoang & Michael Weber, 2022. "Managing Households’ Expectations with Unconventional Policies," The Review of Financial Studies, Society for Financial Studies, vol. 35(4), pages 1597-1642.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:4:p:1597-1642.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhab083
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    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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