Research On The Effectiveness Of Public Expectations On Monetary Policy

One of the most important research areas of macroeconomics is uncertainty, publicexpectations and monetary policy. Uncertainty is everywhere, public expectations arehardly evaluated, and monetary policy operation is influenced by various kinds of factors.The above are the key variables in the macroeconomics analysis. Under the neoclassicalhypothesis there is not the issue of public expectations effectiveness existing because ofexcluding uncertainty. The public could obtain various kinds of information relating toeconomic decisions so the transmission mechanism among the public expectations andthe monetary policy is relative simply. The public are capable to get well known of themonetray policy. The monetary policy which is implemented by central bank could reachits targets as well. However the ideal state of neoclassical hypothesis hardly comes turein the real world. The reasons stem from the fact is that the quantity and quality ofinformation and monetary policy operation is influenced by uncertainty, which makes thepublic couldn’t make the proper expectations. Furthermore, it enhances the difficultywhich the public make the proper expectations on the central bank monetary policy. Ifthis condition lasted for a period，the wealth of the public would be confronted with lossand make the monetary policy malfunction. At last the whole social economic systemwill exposure under the turbulence due to the negative effects of macroeconomicvolatility. Therefore the issue which is how to evaluate and explain the effectiveness ofthe public expectations on monetary policy is badly significant. According to the rationalexpectations theory the public are capable to make analysis and judgments underuncertainty by the effect of studying. During a period of time the public could make theimprovements and amendment of the expectations deviation and enhance the accuracy ofexpectations which means to make the proper decisions. The factors of information andtime are very important while the public make the expectations as well as theindependent and prestige of the central bank. By increaseing the monetary policytransparency，the public would comprehend the purpose of the monetary policy, whichwill reduce the lag of public reaction. Meanwhile, the central bank will guide the publicexpectations more effectively which could save the social cost. Facing above issues, this dissertation makes some relevant analysis:Firstly, this dissertation presents an approach to how we can evaluate differentmeasures of public expectations effectiveness given that real expectations areunobservable. There are three kinds of measures adopted to evaluate the publicexpectations effectiveness. These three fundamentally different measures of expectationsbased on different theories and sample. If we find two different types of measures thathave similar time series properties and, the most important of all, are highly correlated,they are very likely to both measure the unobservable true expectations at the same time.By comparing analysis, it concludes how they can be evaluated and also indicates thatsurvey measures and expectations derived from financial futures prices are moreappropriate than measures based on time series methods.Secondly, on the issue of the reaction of public expectations under exogenousuncertainty， this dissertation takes advantage of two different surveys data by surveymeasure，which introduce three types including nineteen proxy variables to analysis thepublic expectations effectiveness. The measures of this group are based on a variety ofmacroeconomic variables and by performing a factor analysis on them we conclude thatall these different variables have one common factor separately in two groups.Presumably this driving factor is representing some kind of general uncertainty affectingmost public expectations effectiveness variables. In another saying，the public is able tomake the proper expectations.Thirdly, on the issue of public expectations transmission among different countries,this dissertation deals with what is known as the exchange rate risk premium puzzle issue.The UIP hypothesis states that the interest rate differential between two countries shouldreflect the expected exchange rate change so that the expected returns to investments inbonds denominated in the two currencies are equalized. The results of this exercise revealthat if the model is calibrated to make the monetary policy more effective, making theinterest rate differential less volatile, the UIP puzzle can be found in simulated data. Inparticular, if we introduce a preference for interest rate smoothing in the central bank’sloss function, the observed negative relationship between exchange rates and interestrates can be obtained from the model using realistic parameter values.Fourthly, this dissertation makes the analysis on the influencing factor of public expectations effectiveness from the aspect of monetary policy transparency. Using theFutures Method and the change of Federal Reserve fund rate target sample(30-DayFutures), the empirical results present the increasing of the central bank monetary policywill improving the quality of public expectations.During the analysis, this dissertation takes advantage of rational expectation theory,theoretical and empirical analysis, inductive and deductive analysis, comparative analysiscomprehensively. All of these provide a solid support for the conclusion.The significant contribution of this dissertation is listed below. Firstly, to make theuncertainty, public expectations and monetary policy as the research object, through thetheoretical and empirical analysis, this dissertation makes a deeply research on themseparately and systemically. Secondly, in order to solve the problem that is how toevaluate the public expectations effectiveness， this dissertation adopts three kinds ofexpectations measures which include VAR Forecast Method, Futures Method and SurveyMethod to make an indirectly evaluation of public expectation effectiveness. By research,this dissertation concludes public expectations effectiveness make a great influence on,which involves the monetary policy targets, monetary policy operation and the effect ofmonetary policy. Although the uncertainty couldn`t eliminated, the public are capable ofmaking the proper expectations of monetary policy to some extent. The effectivenss ofpublic expectations depends on the factors of time, information and central bankcreditability. Because this dissertation took the United State as the case study object, so itcouldn`t make a meaningful and reasonable explanation to China phenomenon to someextent. In order to reach this goal, it should consider more specific situations of Chinafurther more.