The Importance Of Expectations

There are also lessons for monetary policy. Just as expectations of high post-pandemic house prices create high house prices today, expansionary monetary policy that boosts expected future NGDP can boost NGDP right now. Indeed this is basically the argument for average inflation targeting–create future inflation expectations to raise current inflation. Bullish expectations can’t work miracles (for output) when a real shock like COVID causes people to hunker down, but in a normal recession the expectations channels is by far the most important part of stabilization policy–Nick Rowe likes to say it’s about 99% of monetary policy.

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