By Jan-Niklas Brenneisen
Although it is generally accepted that consumer confidence measures are informative signals about the state of the economy, theoretical macroeconomic models designed for the analysis of monetary policy typically do not provide a role for them. I develop a framework with asymmetric information in which the efficacy of monetary policy can be improved, when the imperfectly informed central banks include confidence measures in their information set. The beneficial welfare effects are quantitatively substantial in both a stylized New Keynesian model with optimal monetary policy and an estimated medium-scale DSGE model.
Policymakers take consumer confidence into account as long as it provides some additional information. In a typical model, consumer expectations do not, as they are formed on the same information set as that of the policymaker. In this paper, households have some private information, and thus their behavior is informative to the policymaker. Is that realistic? Difficult to say. Policymakers are well-informed and I suspect they ponder their decisions more than households. But the private sector still may know things that have not yet made it into the official statistics. Anyway, this paper is an interesting way to study this question.
As Cochrane (1994) puts it, if you ask a consumer about next year’s GDP he will answer ‘I don’t know’, but he may know that his factory is closing and, thus, is consuming less. Such an idiosyncratic shock is correlated with future GDP.
Does such private signals imply superior aggregate information of consumers? What if one would take into account limits to rationality or attention of consumers? Both of these questions were beyond the scope of my paper but are certainly interesting routes for future research.
Thanks a lot for reading my work and your comment. I really like the idea of enabling scientific discussions with your blog and will certainly visit in the future.