Producers' Expectations : Their Role in the Monetary Transmission Mechanism

This article relates to the view expressed by Pigou and Keynes that whatever factors affect the demand for goods it is ultimately producers' expectations and plans that determine the level of output. We build on this notion in order to address the question how changes in monetary policy affect output in Switzerland. For this purpose we study data on expected and actual output collected by the business cycle research center(KOF) at the Federal Institute of Technology (ETH) in Zurich. The econometric analysis documents that monetary affect output only by their impact on expectations of entrepreneurs. This finding contradicts the new classical view of the propagation of monetary shocks