The Effects of Forward Guidance: Theory with Measured Expectations
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The Effects of Forward Guidance: Theory with Measured Expectations. / Roth, Christopher; Wiederholt, Mirko; Wohlfart, Johannes.
2021.Research output: Working paper › Research
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TY - UNPB
T1 - The Effects of Forward Guidance: Theory with Measured Expectations
AU - Roth, Christopher
AU - Wiederholt, Mirko
AU - Wohlfart, Johannes
PY - 2021/11/10
Y1 - 2021/11/10
N2 - We study the effects of forward guidance with an approach that combines theory with experimental estimates of counterfactual expectation adjustments. Guided by the model, we conduct experiments with representative samples of the US population to study how households adjust their expectations in response to changes in the Fed’s projections about future interest rates. Respondents significantly downward-adjust their inflation expectations in response to learning about an increase in the Fed’s projection about the federal funds rate three years in the future, and they expect inflation to respond most strongly immediately after the announcement. By contrast, respondents do not adjust their nominal income expectations. Our model-based estimates highlight a small average consumption response to forward guidance due to opposing effects from intertemporal substitution and changes in expected real income.
AB - We study the effects of forward guidance with an approach that combines theory with experimental estimates of counterfactual expectation adjustments. Guided by the model, we conduct experiments with representative samples of the US population to study how households adjust their expectations in response to changes in the Fed’s projections about future interest rates. Respondents significantly downward-adjust their inflation expectations in response to learning about an increase in the Fed’s projection about the federal funds rate three years in the future, and they expect inflation to respond most strongly immediately after the announcement. By contrast, respondents do not adjust their nominal income expectations. Our model-based estimates highlight a small average consumption response to forward guidance due to opposing effects from intertemporal substitution and changes in expected real income.
KW - Faculty of Social Sciences
KW - Expectation formation
KW - information
KW - Updating
M3 - Working paper
T3 - CEBI Working Paper Series
BT - The Effects of Forward Guidance: Theory with Measured Expectations
ER -
ID: 287765711