Finance and Economics Discussion Series (FEDS)
July 2024
What Can Measured Beliefs Tell Us About Monetary Non-Neutrality?
Hassan Afrouzi, Joel P. Flynn, Choongryul Yang
Abstract:
This paper studies how measured beliefs can be used to identify monetary non-neutrality. In a general equilibrium model with both nominal rigidities and endogenous information acquisition, we analytically characterize firms’ optimal dynamic information policies and how their beliefs affect monetary non-neutrality. We then show that data on the cross-sectional distributions of uncertainty and pricing durations are both necessary and sufficient to identify monetary non-neutrality. Finally, implementing our approach in New Zealand survey data, we find that informational frictions approximately double monetary non-neutrality and endogeneity of information is important: models with exogenous information would overstate monetary non-neutrality by approximately 50%.
Keywords: measured beliefs, nominal rigidities, rational inattention, monetary non-neutrality
DOI: https://doi.org/10.17016/FEDS.2024.053
PDF: Full Paper
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