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Title: Monetary Policy with Opinionated Markets
We build a model in which the Fed and the market disagree about future aggregate demand. The market anticipates monetary policy “mistakes,” which affect current demand and induce the Fed to partially accommodate the market’s view. The Fed expects to implement its view gradually. Announcements that reveal an unexpected change in the Fed’s belief provide a microfoundation for monetary policy shocks. Tantrum shocks arise when the market misinterprets the Fed’s belief and overreacts to its announcement. Uncertainty about tantrums motivates further gradualism and communication. Finally, disagreements affect the market’s expected inflation and induce a policy trade-off similar to “ cost-push” shocks. (JEL D83, E12, E31, E43, E44, E52, E58)  more » « less
Award ID(s):
1848857
PAR ID:
10336156
Author(s) / Creator(s):
;
Date Published:
Journal Name:
American Economic Review
Volume:
112
Issue:
7
ISSN:
0002-8282
Page Range / eLocation ID:
2353 to 2392
Format(s):
Medium: X
Sponsoring Org:
National Science Foundation
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