Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract This paper estimates the effects of monetary policy on the UK economy based on a new, extensive real-time forecast data set. Employing the Romer-Romer identification approach we first construct a new measure of monetary policy innovations for the UK economy. We find that a one percentage point increase in the policy rate reduces output by up to 0.6 per cent and inflation by up to 1.0 percentage point after two to three years. Our approach resolves the price puzzle for the UK and we show that forecasts are crucial for this result. Finally, we show that the response of policy after the initial innovation is crucial for interpreting estimates of the effect of monetary policy. We can then reconcile differences across empirical specifications, with the wider VAR literature and between our UK results and the larger narrative estimates for the US. Terms of use: Documents in EconStor mayJEL: E31, E32, E52, E58.

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract This paper estimates the effects of monetary policy on the UK economy based on a new, extensive real-time forecast data set. Employing the Romer-Romer identification approach we first construct a new measure of monetary policy innovations for the UK economy. We find that a one percentage point increase in the policy rate reduces output by up to 0.6 per cent and inflation by up to 1.0 percentage point after two to three years. Our approach resolves the price puzzle for the UK and we show that forecasts are crucial for this result. Finally, we show that the response of policy after the initial innovation is crucial for interpreting estimates of the effect of monetary policy. We can then reconcile differences across empirical specifications, with the wider VAR literature and between our UK results and the larger narrative estimates for the US. Terms of use: Documents in EconStor mayJEL: E31, E32, E52, E58.

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract This paper explores the importance of shocks to consumer misperceptions, or "noise shocks", in a quantitative business cycle model. I embed imperfect information as in Lorenzoni (2009) into a new Keynesian model with price and wage rigidities. Agents learn about the components of labor productivity by only observing aggregate productivity and a noisy signal. Noise shocks lead to expectational errors about the true fundamentals triggering aggregate fluctuations. Estimating the model with Bayesian methods on US data shows that noise shocks contribute to 20 percent of consumption fluctuations at short horizons. Wage rigidity is pivotal for the importance of noise shocks. Terms of use: Documents in EconStor may

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Reproduction permitted only if source is stated.ISBN 978-3-95729-287-2 (Printversion) Non-technical summary Research QuestionMany central banks have adopted a price stability objective in recent decades. To achieve this objective central banks spend a vast amount of resources to closely track inflation expectations as well as disagreement about inflation expectations. Despite substantial efforts to increase central bank transparency, two stylized facts from survey data stand out: (i) inflation expectations from the private sector are not fully aligned with official central bank forecasts and (ii) market participants disagree about the future inflation path. Against this background, this paper addresses the question: what are the macroeconomic implications if the central bank responds to private sector expectations as opposed to their own forecasts? ContributionWe develop a New Keynesian model where price setting firms have dispersed information and disagree about the state of the economy. In particular, firms observe idiosyncratic signals about the supply and demand conditions in the economy. They also obtain an endogenous public signal, the central banks nominal interest rate, which conveys additional information about the state of the economy. We account for the fact that inflation expectations are an important component of interest rate decisions and contrast the case where the central bank either responds to private sector inflation expectations or their own, better informed forecasts. ResultsWe show that our dispersed information model matches the two stylized facts from survey data: (i) private sector and central bank forecasts are not fully aligned and (ii) private sector forecasters disagree about inflation expectations. Furthermore, we find that under dispersed information the transmission of shocks is sensitive to whether the central bank applies a policy rule that conditions on their optimal forecasts as opposed to private sector forecasts. In particular, in contrast to the full information equilibrium, expansionary monetary policy can lead to lower inflation and inflation expectations as well as higher output, but less so when the central bank responds to private sector expectations. This finding also translates into higher output volatility when the central bank responds to private sector expectations, whereas inflation is less volatile.

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