How Central Banks Use the Expectations Channel

Monetary Policy Explained with Fexingo: Central Banks, Money Supply, and Interest Rates · Jul 7, 2026 · 8m · transcript

Lucas and Luna drill into the expectations channel — how central banks influence the economy not through rate changes alone, but by shaping what people think the future holds. They use the Bank of Japan's 2016 yield curve control announcement and the Federal Reserve's 2022 forward guidance pivot as concrete cases. Lucas explains the academic theory from Michael Woodford's 'Interest and Prices', and Luna pushes back on whether it works when credibility is low. Specific numbers: the 10-year JGB yield target of zero percent, and the 50-basis-point gap between the…