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Expectations and Fluctuations: The Role of Monetary Policy

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  • Michael Rousakis

    (European University Institute)

Abstract

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.

Suggested Citation

  • Michael Rousakis, 2013. "Expectations and Fluctuations: The Role of Monetary Policy," 2013 Meeting Papers 681, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:681
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    Cited by:

    1. Kristoffer P. Nimark, 2014. "Man-Bites-Dog Business Cycles," American Economic Review, American Economic Association, vol. 104(8), pages 2320-2367, August.
    2. Yoo, Donghoon, 2019. "Ambiguous information, permanent income, and consumption fluctuations," European Economic Review, Elsevier, vol. 119(C), pages 79-96.

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