Essays on Macroeconomic Expectations

Abstract

This dissertation consists of three independent explorations of the interplay between expectations and macroeconomic activity. I investigate economic dynamics and policy issues concerning the management of expectations both from the lens of business cycles and medium-term fluctuations, embracing a rational expectations approach as well as venturing into the wilderness of bounded rationality. The first chapter, "Monetary Policy & Anchored Expectations - An Endogenous Gain Learning Model," investigates how a concern to anchor expectations affects the conduct of monetary policy. The chapter first proposes a novel model of expectations which provides a notion for unanchored expectations. In this model, expectations are the more unanchored the higher the sensitivity of long-run inflation expectations to short-run fluctuations. I then embed the expectations model in a general-equilibrium model of the business cycle, and estimate the extent of unanchoring using data on inflation expectations. Within the context of the thus calibrated model, I derive the Ramsey-optimal monetary policy. The main result is that it is optimal for a central bank to anchor inflation expectations to the inflation target. The way the central bank can achieve this is by responding very aggressively with its interest rate tool to fluctuations in long-run inflation expectations. The observation that motivates the second chapter, "Talking in Time - Dynamic Central Bank Communication," is that the management of expectations by the monetary authority is a dynamic problem in two ways. Firstly, in a dynamic economy, a central bank needs to decide when to communicate. Secondly, every time the central bank does talk to the public, it also has to choose what to talk about: the present or the future? The chapter thus extends existing macroeconomic research on various dimensions of optimal central bank communication by asking what the implications of dynamics are for the optimal information provision of the central bank to the public. To this end, I analyze a Bayesian Persuasion game between a central bank and the private sector in a static and a dynamic setting, in which the private sector tracks one economic variable, while the central bank wishes it to track a second variable instead. Importantly, the two problems are identical except for the correlation structure between the two variables, which is either cross-sectional or temporal. This way, I isolate the role of dynamics for the optimal communication policy. The main result is that in the dynamic setting, the prior beliefs of the private sector become endogenous to central bank communication and dampen the effectiveness of the central bank's communication. Therefore, the central bank faces a new tradeoff: it needs to push against priors in two ways. Relatively to the static solution, the central bank talks more about the economic variable it wants the private sector to learn about, and it also talks with less clarity in order to render the private sector's beliefs sufficiently responsive to its messages at each point in time. In the third chapter, "ICT-Specific Investment Shocks and Economic Fluctuations - Evidence and Theory of a General-Purpose Technology," joint with Marco Brianti, I explore empirically the role of information and communication technologies (ICT) for medium-run economic fluctuations. The first set of results demonstrate the hump-shaped dynamics of total factor productivity after an innovation in ICT, as identified in a structural vector autoregression context. I interpret the hump-shaped impulse response as a consequence of the slow diffusion of ICT technologies, and test this hypothesis using an estimated two-sector growth model. The second set of results document that, viewed through the lens of the model, the data favor the interpretation of innovations in the ICT-sector playing the role of a general-purpose technology. In other words, the slow buildup of the overall effect on productivity stems from the gradual diffusion of ICT in the economy.