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The Effects of Monetary Policy "News" and "Surprises"

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  • Fabio Milani

    ()
    (Department of Economics, University of California-Irvine)

  • John Treadwell

    ()
    (Department of Economics, University of California-Irvine)

Abstract

There is substantial agreement in the monetary policy literature over the effects of exogenous monetary policy shocks. The shocks that are investigated, however, almost exclusively represent unanticipated changes in policy, which surprise the private sector and which are typically found to have a delayed and sluggish effect on output. In this paper, we estimate a New Keynesian model that incorporates news about future policies to try to disentangle the anticipated and unanticipated components of policy shocks. The paper shows that the conventional estimates confound two distinct effects on output: an effect due to unanticipated or “surprise” shocks, which is smaller and more short-lived than the response usually obtained in the literature, and a large, delayed, and persistent effect due to anticipated policy shocks or "news." News shocks play a larger role in influencing the business cycle than unanticipated policy shocks, although the overall fraction of economic fluctuations that can be attributed to monetary policy remains limited.

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Bibliographic Info

Paper provided by University of California-Irvine, Department of Economics in its series Working Papers with number 101109.

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Length: 27 pages
Date of creation: May 2011
Date of revision:
Handle: RePEc:irv:wpaper:101109

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Keywords: Anticipated and unanticipated monetary policy shocks; News shocks; New Keynesian model with news shocks; Effects of monetary policy onoutput;

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Citations

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Cited by:
  1. Badarinza, Cristian & Margaritov, Emil, 2011. "News and policy foresight in a macro-finance model of the US," Working Paper Series 1313, European Central Bank.
  2. Luisa Lambertini & Caterina Mendicino & Maria Tereza Punzi, 2011. "Leaning Against Boom-Bust Cycles in Credit and Housing Prices," Working Papers w201108, Banco de Portugal, Economics and Research Department.
  3. Sandra Gomes & Caterina Mendicino, 2012. "Housing Market Dynamics: Any News?," Working Papers Department of Economics 2012/23, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  4. Caterina Mendicino & Maria Tereza Punzi, 2013. "Confidence and economic activity: the case of Portugal," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  5. Paul Beaudry & Franck Portier, 2013. "News Driven Business Cycles: Insights and Challenges," NBER Working Papers 19411, National Bureau of Economic Research, Inc.
  6. Lambertini, Luisa & Mendicino, Caterina & Punzi, Maria Teresa, 2013. "Expectation-driven cycles in the housing market: Evidence from survey data," Journal of Financial Stability, Elsevier, vol. 9(4), pages 518-529.

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