American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Whatever It Takes? The Impact of Conditional Policy Promises
American Economic Review
vol. 115,
no. 1, January 2025
(pp. 295–329)
Abstract
At the announcement of a new policy, agents form a view of state-contingent policy actions and impact. We develop a method to estimate this state-contingent perception and implement it for many asset-purchase interventions worldwide. Expectations of larger support in bad states—"policy puts"—explain a large fraction of the announcements' impact. For example, when the Fed introduced purchases of corporate bonds in March 2020, markets expected five times more price support had conditions worsened relative to the median scenario. Perceived promises of additional support in bad states alter asset prices, risk, and the response to future announcements.Citation
Haddad, Valentin, Alan Moreira, and Tyler Muir. 2025. "Whatever It Takes? The Impact of Conditional Policy Promises." American Economic Review, 115 (1): 295–329. DOI: 10.1257/aer.20230486Additional Materials
JEL Classification
- E52 Monetary Policy
- E58 Central Banks and Their Policies
- G12 Asset Pricing; Trading Volume; Bond Interest Rates
- G13 Contingent Pricing; Futures Pricing; option pricing
- G14 Information and Market Efficiency; Event Studies; Insider Trading
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- G28 Financial Institutions and Services: Government Policy and Regulation