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Expectations and the Effects of Monetary Policy

  • Laurence Ball
  • Dean Croushore

This paper examines the predictive power of shifts in monetary policy, as measured by changes in the 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, suggesting that agents underestimate the effects of policy on aggregate demand. Our results help to explain the real effects of monetary policy, and they provide a strong rejection of the rational expectations hypothesis.

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File URL: http://www.nber.org/papers/w5344.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5344.

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Date of creation: Nov 1995
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Publication status: published as Ball, Laurence and Dean Croushore. "Expectations And The Effects Of Monetary Policy," Journal of Money, Credit and Banking, 2003, v35(4,Aug), 473-484.
Handle: RePEc:nbr:nberwo:5344
Note: EFG ME
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  1. Romer, Christina D. & Romer, David H., 1994. "Monetary policy matters," Journal of Monetary Economics, Elsevier, vol. 34(1), pages 75-88, August.
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  25. Laurence Ball & Stephen G. Cecchetti, 1990. "Inflation and Uncertainty at Long and Short Horizons," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1), pages 215-254.
  26. Laurence Ball, 1993. "What determines the sacrifice ratio?," Working Papers 93-21, Federal Reserve Bank of Philadelphia.
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  32. Herb Taylor, 1992. "The Livingston Surveys: a history of hopes and fears," Business Review, Federal Reserve Bank of Philadelphia, issue Jan, pages 15-27.
  33. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  34. Swidler, Steve & Ketcher, David, 1990. "Economic Forecasts, Rationality, and the Processing of New Information over Time," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(1), pages 65-76, February.
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  36. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  37. Beveridge, Stephen & Nelson, Charles R., 1981. "A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the `business cycle'," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 151-174.
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