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The market-perceived monetary policy rule

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Author Info

  • James D. Hamilton
  • Seth Pruitt
  • Scott C. Borger

Abstract

We introduce a novel method for estimating a monetary policy rule using macroeconomic news. Market forecasts of both economic conditions and monetary policy are affected by news, and our estimation links the two effects. This enables us to estimate directly the policy rule agents use to form their expectations, and in so doing flexibly capture the particular dynamics of policy response. We find evidence that between 1994 and 2007 the market-perceived Federal Reserve policy rule changed: the output response vanished, and the inflation response path became more gradual but larger in long-run magnitude. In a standard model we show that output smoothing caused by a larger inflation response magnitude is offset by the more measured pace of response. Our response coefficient estimates are robust to measurement and theoretical issues with both potential output and the inflation target.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 982.

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Date of creation: 2009
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Handle: RePEc:fip:fedgif:982

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Related research

Keywords: Monetary policy - United States ; Economic forecasting - United States;

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References

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  1. Piazzesi, Monika & Swanson, Eric T., 2008. "Futures prices as risk-adjusted forecasts of monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 677-691, May.
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper 0107, Federal Reserve Bank of Cleveland.
  3. Athanasios Orphanides & Simon van Norden, 1999. "The reliability of output gap estimates in real time," Finance and Economics Discussion Series 1999-38, Board of Governors of the Federal Reserve System (U.S.).
  4. Owyang, Michael T. & Ramey, Garey, 2001. "Regime Switching and Monetary Policy Measurement," University of California at San Diego, Economics Working Paper Series qt24q32688, Department of Economics, UC San Diego.
  5. Hamilton, James D., 2008. "Daily monetary policy shocks and new home sales," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1171-1190, October.
  6. Andrew Ang & Sen Dong, 2005. "No-Arbitrage Taylor Rules," 2005 Meeting Papers 22, Society for Economic Dynamics.
  7. Adrian Pagan, 1985. "Two Stage and Related Estimators and Their Applications," Cowles Foundation Discussion Papers 741, Cowles Foundation for Research in Economics, Yale University.
  8. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2005. "The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models," American Economic Review, American Economic Association, vol. 95(1), pages 425-436, March.
  9. Glenn D. Rudebusch, 2001. "Term structure evidence on interest rate smoothing and monetary policy inertia," Working Paper Series 2001-02, Federal Reserve Bank of San Francisco.
  10. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
  11. Josephine M. Smith & John B. Taylor, 2007. "The Long and the Short End of the Term Structure of Policy Rules," NBER Working Papers 13635, National Bureau of Economic Research, Inc.
  12. Jon Faust & John H. Rogers & Shing-Yi B. Wang & Jonathan H. Wright, 2003. "The high-frequency response of exchange rates and interest rates to macroeconomic announcements," International Finance Discussion Papers 784, Board of Governors of the Federal Reserve System (U.S.).
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Citations

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Cited by:
  1. Michael D. Bauer, 2011. "Nominal interest rates and the news," Working Paper Series 2011-20, Federal Reserve Bank of San Francisco.
  2. James D. Hamilton & Seth Pruitt & Scott Borger, 2011. "Estimating the Market-Perceived Monetary Policy Rule," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(3), pages 1-28, July.
  3. Nikolay Markov & Thomas Nitschka, 2013. "Estimating Taylor Rules for Switzerland: Evidence from 2000 to 2012," Working Papers 2013-08, Swiss National Bank.
  4. Di Maggio, Marco, 2010. "The Political Economy of the Yield Curve," MPRA Paper 20697, University Library of Munich, Germany.
  5. Carlos Carvalho & Fernanda Nechio, 2012. "Do people undestand monetary policy?," Working Paper Series 2012-01, Federal Reserve Bank of San Francisco.
  6. Jeffrey R. Campbell & Charles Evans & Jonas D. M. Fisher & Alejandro Justiniano, 2012. "Macroeconomic effects of Federal Reserve forward guidance," Working Paper Series WP-2012-03, Federal Reserve Bank of Chicago.
  7. Sinclair, Tara M. & Gamber, Edward N. & Stekler, Herman & Reid, Elizabeth, 2012. "Jointly evaluating the Federal Reserve’s forecasts of GDP growth and inflation," International Journal of Forecasting, Elsevier, vol. 28(2), pages 309-314.

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