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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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References

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  1. Fabio Canova & Gianni De Nicolo, 2000. "Monetary disturbances matter for business fluctuations in the G-7," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 660, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Luisa Lambertini & Caterina Mendicino & Maria Teresa Punzi, 2011. "Leaning Against Boom-Bust Cycles in Credit and Housing Prices," Working Papers, Center for Fiscal Policy, Swiss Federal Institute of Technology Lausanne 201101, Center for Fiscal Policy, Swiss Federal Institute of Technology Lausanne, revised Mar 2011.
  2. Badarinza, Cristian & Margaritov, Emil, 2011. "News and policy foresight in a macro-finance model of the US," Working Paper Series, European Central Bank 1313, European Central Bank.
  3. 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, Banco de Portugal, Economics and Research Department.
  4. Beaudry, Paul & Portier, Franck, 2013. "News Driven Business Cycles: Insights and Challenges," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9624, C.E.P.R. Discussion Papers.
  5. Sandra Gomes & Caterina Mendicino, 2012. "Housing Market Dynamics: Any News?," Working Papers Department of Economics, ISEG - School of Economics and Management, Department of Economics, University of Lisbon 2012/23, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  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, Elsevier, vol. 9(4), pages 518-529.

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