A0224
Title: Evaluating the dynamics of monetary policy: The implications of speed, level, and duration in interest rate adjustments
Authors: Jonghyuck Lim - The University of North Carolina at Chapel Hill (United States) [presenting]
Neville Francis - University of North Carolina Chapel Hill (United States)
Michael Owyang - Federal Reserve Bank of St Louis (United States)
Abstract: The aim is to examine how oil supply shocks reshape the distribution of U.S. household inflation expectations. Using a functional vector autoregression (fVAR) framework, the evolution of macroeconomic variables and the full cross-sectional density of household expectations are jointly modeled. Identification follows the Bayesian proxy SVAR approach with external oil supply instruments from a prior study. The results reveal that oil shocks disproportionately shift the right tail of the expectations distribution, raising upper-tail beliefs persistently while lower-tail beliefs revert quickly, leading to widening disagreement and long-lived heterogeneity. These findings highlight the limits of representative-expectations frameworks and underscore the importance of monitoring and communicating to the entire distribution of expectations to preserve policy credibility.
