Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/95695
Authors: 
Kryvtsov, Oleksiy
Petersen, Luba
Year of Publication: 
2013
Series/Report no.: 
Bank of Canada Working Paper 2013-44
Abstract: 
The effectiveness of monetary policy depends, to a large extent, on market expectations of its future actions. In a standard New Keynesian business-cycle model with rational expectations, systematic monetary policy reduces the variance of inflation and the output gap by at least two-thirds. These stabilization benefits can be substantially smaller if expectations are non-rational. We design an economic experiment that identifies the contribution of expectations to macroeconomic stabilization achieved by systematic monetary policy. We find that, despite some non-rational component in expectations formed by experiment participants, monetary policy is quite potent in providing stabilization, reducing macroeconomic variance by roughly half.
Subjects: 
Business fluctuations and cycles
Monetary policy implementation
Transmission of monetary policy
JEL: 
C9
D84
E3
E52
Document Type: 
Working Paper

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