Expectations shape consumption and the power of monetary policy
Writing in El Mundo/Actualidad Económica on October 18, 2026, Banco de España economics director David López Salido explains how 2026 economics Nobel laureates Robert E. Hall and Michael Woodford connect expectations to economic stabilization.
Future income shapes today's spending
Hall's 1978 article showed that, under certain conditions, consumption changes cannot be predicted using information households already incorporate into spending plans.
Building on Milton Friedman's permanent-income concept, Hall explained why news about lifetime resources changes consumption.
Households may save much of a temporary windfall but increase spending more persistently after a lasting income gain.
Tax cuts therefore have different effects depending on their duration, announcement, anticipated financing and household resource constraints.
Saving a tax cut against future tax increases reflects Ricardian equivalence, not a contribution specific to Hall.
Present resources and future prospects both matter.
Three equations connect present and future
Woodford's Interest and Prices: Foundations of a Theory of Monetary Policy (Princeton University Press, 2003) develops a New Keynesian model linking demand, inflation and monetary policy.
Expected real interest rates influence when households spend.
Firms facing infrequent price adjustments consider current and anticipated costs, as captured by the New Keynesian Phillips curve.
Policy centers on interest rates rather than money quantities.
Credible guidance about future rates can affect financial conditions and spending before the next rate change.
Credibility requires action
López Salido links effective policy to an explicit inflation target, often 2 percent, consistent decisions and clear communication.
Commitment allows flexibility rather than mechanical adherence to a fixed rule.
Communication cannot replace action, but anchored expectations can limit persistent wage and price increases after temporary shocks.