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.