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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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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. 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.
  3. Di Maggio, Marco, 2010. "The Political Economy of the Yield Curve," MPRA Paper 20697, University Library of Munich, Germany.
  4. Fernanda Nechio & Carlos Carvalho, 2012. "Do People Understand Monetary Policy?," 2012 Meeting Papers 426, Society for Economic Dynamics.
  5. Carlos Carvalho & Fernanda Nechio, 2012. "Do people undestand monetary policy?," Working Paper Series 2012-01, Federal Reserve Bank of San Francisco.

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