Monetary policy makers are uncertain about the state of the economy and learn from the economy's reaction to policy. Private agents, however, anticipate any systematic attempt to incorporate this information into future policy. We analyze this feedback in the context of a monetary authority's attempt to stimulate an economy in recession. We show that modest stimuli may prove ineffectual. If small reductions in interest rates are unlikely to promote a response, then they may be followed by further cuts. A vicious circle develops in which the expectation that the policy could fail leads investors to delay investment thereby promoting failure.
|Original language||English (US)|
|Number of pages||14|
|Journal||American Economic Review|
|State||Published - Sep 1996|
ASJC Scopus subject areas
- Economics and Econometrics