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Estimating the Market-Perceived Monetary Policy Rule

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  • James D. Hamilton
  • Seth Pruitt
  • Scott Borger

Abstract

We introduce a novel method for estimating a monetary policy rule using macroeconomic news. We estimate directly the policy rule agents use to form their expectations by linking news' effects on forecasts of both economic conditions and monetary policy. Evidence between 1994 and 2007 indicates that 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. These 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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16412.

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Date of creation: Sep 2010
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Publication status: published as 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.
Handle: RePEc:nbr:nberwo:16412

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  1. Peter N. Ireland, 2007. "Changes in the Federal Reserve's Inflation Target: Causes and Consequences," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 39(8), pages 1851-1882, December.
  2. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
  3. Andrew Ang & Jean Boivin & Sen Dong & Rudy Loo-Kung, 2009. "Monetary Policy Shifts and the Term Structure," NBER Working Papers 15270, National Bureau of Economic Research, Inc.
  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. Athanasios Orphanides, 1998. "Monetary policy rules based on real-time data," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1998-03, Board of Governors of the Federal Reserve System (U.S.).
  6. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(1), pages 1-45, February.
  7. Monika Piazzesi & Eric Swanson, 2004. "Future prices as risk-adjusted forecasts of monetary policy," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Mar.
  8. James D. Hamilton & Seth Pruitt & Scott C. Borger, 2009. "The market-perceived monetary policy rule," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 982, Board of Governors of the Federal Reserve System (U.S.).
  9. Thapar, Aditi, 2008. "Using private forecasts to estimate the effects of monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 806-824, May.
  10. Andrew Ang & Sen Dong & Monika Piazzesi, 2007. "No-Arbitrage Taylor Rules," NBER Working Papers 13448, National Bureau of Economic Research, Inc.
  11. Sharon Kozicki & P.A. Tinsley, 1997. "Shifting endpoints in the term structure of interest rates," Research Working Paper, Federal Reserve Bank of Kansas City 97-08, Federal Reserve Bank of Kansas City.
  12. Timothy Cogley & Argia M. Sbordone, 2008. "Trend Inflation, Indexation, and Inflation Persistence in the New Keynesian Phillips Curve," American Economic Review, American Economic Association, vol. 98(5), pages 2101-26, December.
  13. Leonardo Bartolini & Linda Goldberg & Adam Sacarny, 2008. "How economic news moves markets," Current Issues in Economics and Finance, Federal Reserve Bank of New York, Federal Reserve Bank of New York, vol. 14(Aug).
  14. Nicholas Taylor, 2010. "The Determinants of Future U.S. Monetary Policy: High-Frequency Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 42(2-3), pages 399-420, 03.
  15. Torben G. Andersen & Tim Bollerslev, 1998. "Deutsche Mark-Dollar Volatility: Intraday Activity Patterns, Macroeconomic Announcements, and Longer Run Dependencies," Journal of Finance, American Finance Association, vol. 53(1), pages 219-265, 02.
  16. 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.
  17. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
  18. Jean Boivin, 2005. "Has US Monetary Policy Changed? Evidence from Drifting Coefficients and Real-Time Data," NBER Working Papers 11314, National Bureau of Economic Research, Inc.
  19. 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.
  20. Giorgio Primiceri, 2005. "Why Inflation Rose and Fell: Policymakers' Beliefs and US Postwar Stabilization Policy," NBER Working Papers 11147, National Bureau of Economic Research, Inc.
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Cited by:
  1. John Y. Campbell & Carolin Pflueger & Luis M. Viceira, 2014. "Monetary Policy Drivers of Bond and Equity Risks," NBER Working Papers 20070, National Bureau of Economic Research, Inc.
  2. Lapp, John S. & Pearce, Douglas K., 2012. "The impact of economic news on expected changes in monetary policy," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 362-379.
  3. Linda S. Goldberg & Christian Grisse, 2013. "Time variation in asset price responses to macro announcements," Working Papers 2013-11, Swiss National Bank.

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