Macroeconomics: Monetary policy with opinionated markets

Professor Ricardo Caballero, MIT

'Monetary Policy with Opinionated Markets' (co-authored by A. Simsek)
Thursday 30 September, 3pm - 4.30pm
Zoom online seminar

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Abstract

We build a model in which the Fed and the market may disagree about future aggregate demand. In this context, the market anticipates monetary policy "mistakes," which influence current aggregate demand. Thus, to stabilise the output gap, the Fed partially accomodates the market's view in the short run. The Fed also expects to implement its view gradually, waiting for the data to move the market's belief toward the Fed's belief. With disagreements, announcements that reveal a surprise change in the Fed's belief provide a microfoundation for monetary policy shocks. Tantrum shocks arise when the Fed fails to predict the market's reaction to its announcement. Uncertainty about tantrum shocks motivate further gradualism and communication. Finally, disagreements create a policy trade-off between output and inflation stabilisation akin to "cost-push" shocks.

Biography

Ricardo J. Caballero is the Ford International Professor of Economics, a Director of the World Economic Laboratory at the Massachusetts Institute of Technology (MIT), and an NBER Research Associate. Caballero was the Chairman of MIT's Economics Department (2008-2011). His teaching and research fields are macroeconomics and finance. Caballero has an extensive list of publications in all major academic journals. Among his major awards, he was the winner of the 2002 Frisch Medal of the Econometric Society for “Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach”, Econometrica, 67(4), July 1999 (joint work with Eduardo Engel); the Smith Breeden Prize by the American Finance Association for “Collective Risk Management in a Flight to Quality Episode”, Journal of Finance, 63(5), October 2008 (joint with Arvind Krishnamurthy), Journal of Finance 2014 Brattle Group Prize for distinguished papers for “Fire Sales in a Model of Complexity,” joint with Alp Simsek. In April 1998, Caballero was elected a Fellow of the Econometric Society and subsequently of the American Academy of Arts and Sciences in April 2010.


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First published: 25 August 2021