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Expectations and Fluctuations: The Role of Monetary Policy

  • Michael Rousakis

    (European University Institute)

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    This paper reconsiders the effects of expectations on economic fluctuations. It does so within a competitive monetary economy featuring producers and consumers with heterogeneous information about productivity. Agents' expectations are coordinated by a noisy public signal which generates non-fundamental, purely expectational shocks. Agents' expectations, however, have different implications for the economy. Hence, depending on how monetary policy is pursued, purely expectational shocks can behave like either demand shocks, as conventionally thought, or supply shocks - increasing output and employment yet lowering inflation. On the policy front, conventional policy recommendations are overturned: inflation stabilization is suboptimal, whereas output-gap stabilization is optimal.

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    File URL: https://economicdynamics.org/meetpapers/2013/paper_681.pdf
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    Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 681.

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    Date of creation: 2013
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    Handle: RePEc:red:sed013:681
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    Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

    Web page: http://www.EconomicDynamics.org/
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