How Important is the Information Effect of Monetary Policy? with Chengcheng Jia, December 2023
Abstract: Is the “information effect” of monetary policy quantitatively important? We first use a simple model to show that under asymmetric information, monetary policy surprises are correlated with the unobserved state of the economy. This correlation implies that monetary policy surprises provide information about the state of the economy, and at the same time, explain why the estimation of the information effect may be biased. We then develop a New Keynesian DSGE model under asymmetric information and calibrate model parameters to match macroeconomic dynamics in the US and forecasting accuracy in the Greenbook. Under our calibration, both the central bank and the private sector initially have noisy information. Over time, the information effect of monetary policy mitigates information frictions by enhancing the two-way learning between the central bank and the private sector.
Learning from Monetary and Fiscal Policy with Fei Tan and Jieran Wu, January 2021
Abstract: We present a dynamic incomplete information model where monetary and fiscal policy instruments serve as endogenous signals for the private sector. We highlight a novel information channel of policy interactions and show the general equilibrium (GE) information feedback between policies largely shapes the economy's response to policy shocks. We document a non-monotone signaling effect of policies with respect to the policy rule parameters. Our analysis shows the GE information feedback is quantitatively significant, and the model provides a unified explanation of the various policy impacts on inflation, the dynamics of survey expectations, and the missing inflation after the Great Recession.
Guo, Junjie and Zhao Han (2025), Time-Varying Government Spending Foresight, Journal of Economic Dynamics and Control, Volume 173, April 2025.
Abstract: Government spending forecast is noisy and displays time-varying uncertainties. Using the Survey of Professional Forecasters, we establish three stylized facts about disagreement regarding future discretionary government spending. A simple noise representation of foresight à la Chahrour and Jurado (2018) featuring stochastic volatility captures these stylized facts. We analyze both qualitatively and quantitatively how the noisy foresight structure impacts the macroeconomy under different monetary-fiscal policy regimes. Time-varying government spending foresight manifests its effect through non-zero noise shocks by generating state-dependent government spending multipliers.
Han, Zhao (2024): Asymmetric Information and Misaligned Inflation Expectations, Journal of Monetary Economics, Volume 143, April 2024.
Abstract: Recent survey evidence reveals misaligned inflation expectations among economic agents. While households associate higher expected inflation with lower output growth, professional forecasters often link higher future inflation to stronger economic fundamentals and higher output growth. Firms' expectations display neither negative nor positive correlations. We explain such patterns jointly in a general equilibrium New Keynesian framework. Asymmetric information arises naturally as (i) households and firms receive imperfect, asymmetric information about supply and demand shocks, and (ii) the central bank learns from equilibrium outcomes (i.e., output and inflation) as opposed to the inattentive private sector. Survey data help uncover the magnitudes of information frictions among economic agents. Asymmetric information has profound implications for business cycles and central bank communication.
Han, Zhao, Xiaohan Ma and Ruoyun Mao (2023), The Role of Dispersed Information in Inflation and Inflation Expectations, Review of Economic Dynamics, Volume 48, April 2023.
Download data and replication files here [IDEAS]
Abstract: We solve a rational expectations model of price formation with nominal rigidity and information frictions analytically to study how dispersed information impacts inflation and inflation expectations, without imposing strong structural assumptions on the aggregate marginal cost. We derive a Phillips curve that links inflation, average inflation forecast (i.e., a first-order expectation), and the net effect of higher-order expectations (HOEs). We quantify the essential role of dispersed information in generating inflation inertia and predictable average nowcast and forecast errors. The estimated effect from dispersed information explains a significant inflation variation, and the net effect of HOEs provides a novel micro-foundation for markup shocks.
Han, Zhao, Fei Tan and Jieran Wu (2022): Analytic Policy Function Iteration, Journal of Economic Theory, Volume 200, March 2022.
Abstract: We propose an approach to solving and analyzing linear rational expectations models with general information frictions. Our approach is built upon policy function iterations in the frequency domain. We develop the theoretical framework of this approach using rational approximation, analytic continuation, and discrete Fourier transform. Conditional expectations, which are difficult to evaluate in the time domain, can be calculated efficiently in the frequency domain. We provide the numerical implementation accompanied by a flexible object-oriented toolbox. We demonstrate the efficiency and accuracy of our method by studying four models in macroeconomics and finance that feature asymmetric information sets, endogenous signals, and higher-order expectations.
Han, Zhao (2021): Low-Frequency Fiscal Uncertainty, Journal of Monetary Economics, Volume 117, January 2021.
Abstract: Long-run fiscal levels, or synonymously, fiscal targets, are usually assumed to be known to households inside the economy. This paper investigates the effects of unknown fiscal targets in an incomplete information, anticipated utility (IIAU) environment. Slowly increasing transfer payments cause households to suspect time-varying targets, and misperceptions impact both their expectation formation and decision making. Perceived targets enter the IIAU model as nonlinear state variables, introducing state-dependent fiscal multipliers. The short-run stimulus effects of Trump's 2017 and Reagan's 1981 Tax Cuts are comparable and modest. The long-run effects of Trump's Tax Cuts worse off if transfers continue to increase.
Han, Zhao (2015): A Dynamic Asset Pricing Model with Non-Myopic Traders, Economics Bulletin, 35, 1788-1794.
Abstract: Dynamic asset pricing models built within the classic CARA-Normal framework usually assume myopic traders with one-period investment horizons or infinitely lived investors for tractability. I relax this myopic assumption and show the values of more finite trading opportunities are state-contingent and arise naturally as non-central Chi-Square distributed. The moment generating function of the non-central Chi-Square distribution thus can be utilized to derive the traders' first-order conditions and preserve closed-form solutions. The model with non-myopic traders has a modified two-period overlapping generations(OLG) interpretation in which each young generation can have multiple investment opportunities.