UC Berkeley

This dissertation has three chapters where I discuss new evidence on the role of expectations and price adjustment for macroeconomic policy. The first two chapters explore the role of expectations for macroeconomics. In the first chapter, I study a particular communication event and show that policy communication can have an effect on expectations and consumer behavior. The second chapter, that is join work with Olivier Coibion, Yuriy Gorodnichenko and Saten Kumar, studies more systematically the role of expectations, how to measure them and what we know about the use of expectations as a policy tool. The third chapter, that is join work with Juan Herreño, explores the distributional effect of monetary policy and how different group of population are differently affected depending on their level of income. We explore the implications of these results on real income inequality over the business cycle.

In the first chapter of this dissertation, I use regional variation in radio exposure in 1930 to analyze the impact of President Franklin D. Roosevelt's 1935 speech, in which he showcased the introduction of important economic and social policies. I document that states and cities with higher exposure to the announcement exhibited a significant increase in spending on durable goods. I transcribed weekly data on banks debits and show that cities one standard deviation more exposed to the speech increased their bank debits by 3.6 percent following the speech. I provide evidence that suggests that this result is not driven by wealth or other potentially confounding variables. I provide suggestive evidence that the effect is associate with the content of the speech and might come from a combination of economic confidence and the details of the policies announced.

In the second chapter, we assess whether central banks may use inflation expectations as a policy tool for stabilization purposes. We review recent work on how expectations of agents are formed and how they affect their economic decisions. Empirical evidence suggests that inflation expectations of households and firms affect their actions but the underlying mechanisms remain unclear, especially for firms. Two additional limitations prevent policy-makers from being able to actively manage inflation expectations. First, available surveys of firms' expectations are systematically deficient, which can only be addressed through the creation of large, nationally representative surveys of firms. Second, neither households' nor firms' expectations respond much to monetary policy announcements in low-inflation environments. We provide suggestions for how monetary policy-makers can pierce this veil of inattention through new communication strategies. At this stage, there remain a number of implementation issues and open research questions that need to be addressed to enable central banks to use inflation expectations as a policy tool.

In the third chapter, we study the distributional effects of monetary policy. We find that prices in relatively poorer cities react more to a monetary policy shock identified with the Romer and Romer (2004) methodology. This result holds across different definitions and classifications of price indexes, including when every region has the same weights across goods. It also holds for a wide set of categories of consumer expenditure. This pattern is consistent with regional heterogeneity in real rigidities. We build a New Keynesian model where consumers have non-homothetic preferences arising from a subsistence level of consumption. In this setting, poor regions exhibit steeper Phillips Curves. This implies that regional inequality in real wages increases after expansionary monetary policy shock due to a combination of smaller increases in prices and bigger expansions in economic activity in richer regions.