Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/207184 
Year of Publication: 
2019
Series/Report no.: 
CESifo Working Paper No. 7793
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
The empirical effectiveness of economic policies that operate theoretically through similar channels differs substantially. We document this fact by comparing an easy-to-grasp expectations-based policy, unconventional fiscal policy, with a policy whose implications are harder to understand by non-expert consumers, forward guidance. Both policies aim to stimulate consumption via managing inflation expectations based on the Euler equation. Unconventional fiscal policy uses trivial announcements of future consumer-price increases to boost inflation expectations and consumption expenditure on impact. Instead, forward guidance requires that agents understand the inflationary effects of future low interest rates to increase their inflation expectations and spending today. We find households’ inflation expectations and readiness to spend react substantially to unconventional fiscal policy announcements. The reaction is homogeneous across households with different levels of sophistication. Instead, households do not react after forward guidance announcements. These results support recent work stressing the importance of limited cognition for the effectiveness of policies.
Subjects: 
expectations
natural experiments
consumption
fiscal policy
monetary policy
macroeconomics with micro data
JEL: 
D12
D84
D91
E21
E31
E32
E52
E65
Document Type: 
Working Paper
Appears in Collections:

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.