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Department of Economics

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Economics Department
Kansas State University
327 Waters Hall
1603 Old Claflin Place
Manhattan, KS 66506
785-532-7357
785-532-6919 fax
econ@k-state.edu

 

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Dr. Steven Cassou | Working Papers

 Asymmetric effects of expectation shocks when monetary policy regimes shift: Evidence from survey data

Abstract: Using the Survey of Professional Forecasters and Livingston Survey data, this paper empirically investigates the effects of expectation shocks on macroeconomic activities when monetary policy shifts between policy regimes. Two policy switching structures, including an opportunistic monetary policy structure and a structure contingent on the unemployment rate, are investigated. Identifying an expectation shock by using the timing of information in the survey forecasts and the actual data releases, we show that the effects of expectation shocks on current and future macroeconomic activities are stronger in a hawkish monetary policy regime than in a dovish monetary policy regime. Our findings do not support the view of some central bank critics who argued that keeping monetary policy too easy for too long is responsible for fueling the booms. Instead, we find that a positive (negative) expectation about the future results in an anticipatory tightening (easing) of monetary policy.

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