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Assessing Expectations as a Monetary/Fiscal State-Dependent Phenomenon

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  • Martin Geiger
  • Marios Zachariadis

Abstract

We assess the impact of monetary and fiscal policy shocks on US survey-based macroeconomic expectations elicited from consumers and financial experts, within and outside low-debt states of the world. While we fail to detect a clear response to shocks in a linear model, our analysis reveals a number of state-dependent patterns. The response of consumers' expectations to the monetary and fiscal shocks we jointly consider is typically strong and distinctly different outside states of low debt as compared to within states of low debt where we observe little action. Outside low-debt states, an increase in government spending has adverse effects on expectations consistent with the anticipation of negative effects from a future fiscal consolidation. Moreover, contractionary monetary policy shocks induce pessimistic macroeconomic expectations outside the low-debt state but not within it, suggesting that the fiscal burden matters in how monetary policy affects expectations. Our findings are in line with rationally inattentive consumers not paying attention to shocks occurring when the fiscal burden is low. Finally, consumer expectations' responses more closely resemble those of experts outside the low-debt state, in line with consumers becoming more attentive to fiscal and monetary developments when the stakes are high.

Suggested Citation

  • Martin Geiger & Marios Zachariadis, 2019. "Assessing Expectations as a Monetary/Fiscal State-Dependent Phenomenon," University of Cyprus Working Papers in Economics 01-2019, University of Cyprus Department of Economics.
  • Handle: RePEc:ucy:cypeua:01-2019
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    More about this item

    Keywords

    policy shocks; public debt; rational inattention; fiscal theory of the price level;
    All these keywords.

    JEL classification:

    • 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

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